Bitcoin: When Computational Performance Data Is Mistaken for Financial Data

When Bitcoin was introduced as a decentralized way to store data in a manner that prevents tampering or loss, its creators claimed that the data it stored was financial in nature. They referenced financial institutions and even asserted that Bitcoin solved the problem of trust that leads to crises in those institutions.

Yet financial data tracks obligations and corresponding claims, which do not exist in the Bitcoin system. Some later decentralized systems, such as Tether or PayPal USD, do contain financial data because they track claims on issuers who promise to redeem them for dollars or PayPal balances. Even so, they do not solve the problem of trust. Users must still rely on the issuers to honor those claims. Financial crises occur precisely when claims are not honored.

No financial crisis has ever resulted from central securities depositories, banks, or electronic money issuers tampering with client data. Crises have arisen because companies issuing stocks went bankrupt, banks extended too many bad loans, or e-money issuers became insolvent. Centralized data storage or poor recordkeeping was never the root cause.

Therefore, even if Bitcoin stored financial data, it could not prevent or resolve issues related to financial crises. In reality, Bitcoin stores only computational performance data.

Computers operated by Bitcoin miners solve cryptographic puzzles. The more puzzles they solve, the higher their score becomes. It is this score that the Bitcoin system records and transfers. In effect, miners solve puzzles in order to store the scores they receive for solving them. The entire system is circular: it generates data solely to track its own activity. It is a useless loop.

This differs sharply from useful performance data. Consider a gym that starts tracking how many push-ups its members complete. Such data could serve practical purposes: monitoring fitness progress, boosting engagement, analyzing behavior, or supporting marketing and health initiatives. It would make sense to pay for access to that information, and buyers would acquire the complete dataset.

In the case of Bitcoin, however, a global audience has begun a bidding war for chunks of its useless data. Early on, one person traded two pizzas for 10,000 BTC, which equated to roughly $0.001 per BTC. Today, people pay around $80,000 for the same unit. Acquiring the original 10,000 BTC chunk would now cost approximately $800 million.

The irrationality of this becomes clear when we examine why people pay to hold financial data.

In financial systems, holding bigger numerical data related to stocks or fiat currency justifies greater payment or labour because it represents a larger claim. Stocks represent claims on a company’s future cash flows. Larger holdings mean larger dividends or liquidation proceeds. Fiat currencies represent claims on bank borrowers. Because currency is issued as loans, borrowers must work, produce goods, or provide services to repay those loans and protect their collateral. If borrowers default, banks honor the claims by selling the seized assets. In both cases, a larger number entitles the holder to more future utility.

In Bitcoin, however, people pay more simply because the protocol assigned a higher score to a useless computational performance.

This cannot last. In the long run, no rational person would surrender even the smallest claim on future utility in exchange for data recording meaningless past activity.