The value of Bitcoin comes from many different attributes. Ultimately, both fiat and cryptocurrencies are valued by trust. As society trusts the fiat system, money will continue to have value. Similar to Bitcoin: it has value because users believe it has, but there’s more to consider.
Unlike fiat, Bitcoin does not have its decentralized structure and the central bank allows the creation of a unique financial system. Blockchain technology offers a lot of convenience, security, and other benefits. Bitcoin also offers a revolutionary way to deal with the transfer of value around the world. Besides, it can also act as a store of value similar to gold in many ways.
About Bitcoin’s Value
One of the biggest difficulties for newcomers to cryptocurrencies is understanding how and why a cryptocurrency like Bitcoin (BTC) can have value. This is a Digital Currency, the concept of mining can be very confusing and has no physical asset backing it up. In a sense, mining just creates new bitcoins out of thin air. However, successful mining requires a very expensive investment in practice. But how does all this make BTC valuable?
Think about how much money people use every day. No more gold or assets backing our banknotes. The money that we borrow often only exists thanks to the fractional reserve bank in the form of numbers on the screen. Central banks and Governments like the Federal Reserve can create new money and increase its supply through economic mechanisms.
Despite its differences, BTC (a form of digital currency) has some points with the fiat money we are familiar with. Therefore, let’s talk about the value of fiat money first before we delve into the crypto ecosystem.
Why is money valuable?
In a word, what gives money value is trust. In essence, money is a tool used to exchange value. Anything can be used as money, as long as the community accepts it as payment for services and goods. In the early days of human civilization, there were many types of objects used for money – from seashells to stones.
What is fiat money?
Fiat money is a formalized currency issued by the government. Currently, our society exchanges value through the use of paper money, coins, and digital numbers on bank accounts (which also determine how much credit or debt we have).
People could go to the bank to exchange paper money for precious metals (gold) before. This mechanism ensures that currencies such as the US dollar have a value tied to an equal amount of gold. However, the gold standard is no longer the basis of the monetary system as it has been abandoned by most countries.
After removing the relationship of currency and gold, we use fiat money without any backing. This gave governments and central banks more freedom in applying monetary policies and influencing the money supply. Some of the key features of fiat are:
- It is issued by the government or central authority.
- It has no inherent value and is not backed by gold or any other commodity.
- Fiat has an unlimited potential supply.
Why is fiat valuable?
We seem to have a valueless currency with the removal of the gold standard. However, the money still pays for bills, food, rent and other expenses. As discussed, money derives its value from collective trust. Therefore, the government needs to firmly support and successfully manage a fiat currency in order to succeed and maintain a high level of trust. It is easy to see how this is shattered when trust in the central bank or government is either lost due to ineffective monetary policies and hyperinflation as seen in Venezuela and Zimbabwe.
How did cryptocurrency get its value?
Cryptocurrencies have a few things in common with the standard idea of money, but there are some differences. Although some cryptocurrencies like PAXG are pegged to commodities like gold. However, most cryptocurrencies have no underlying assets. Instead, trust plays an important role in the value of cryptocurrencies. For example, people see value in investing in Bitcoin and know that others also trust Bitcoin and accept BTC as a payment system and medium of exchange.
Utility is also an important factor for some cryptocurrencies. You may need to use utility tokens to access certain services or platforms. Therefore, a service in high demand will provide value for its utility token. Of course not all cryptocurrencies are the same. So their value really depends on the features of each coin, project or token.
When it comes to Bitcoin, we can narrow it down to six features that we will discuss in more detail later: decentralization, utility, distribution, scarcity, trust system, and security.
What is intrinsic value?
What does it mean? A lot of the discussion regarding the value of Bitcoin is whether it has any intrinsic value. If we look at a commodity like oil, it has intrinsic value in the production of plastics, energy and other materials.
Similarly, stocks also have intrinsic value because they represent equity in a company that services or produces goods. In fact, many investors perform fundamental analysis in an attempt to calculate an asset’s intrinsic value. On the other hand, fiat money has no intrinsic value as it is just a piece of paper. As we have seen, its value stems from trust.
The traditional financial system has many intrinsic value investment options, from stocks to commodities. The forex market is an exception as they deal with fiat currencies and traders often profit from medium or short term exchange rate fluctuations. But what about Bitcoin?
Why is Bitcoin valuable?
The value of Bitcoin is a topic with many differing opinions. Many people might say that the market price of Bitcoin is what it is worth. However, that doesn’t exactly answer our question. What’s more important is why people value it in the first place. Let’s find in more detail what makes Bitcoin valuable.
Bitcoin’s Value in Utility
One of the main benefits of Bitcoin is its ability to quickly transfer large amounts of value around the world without the need for an intermediary. While sending small amounts of BTC due to fees can be relatively expensive, you can also send millions of dollars on the cheap. Here you can see a Bitcoin transaction worth about $45,000,000 (USD) sent for just under $50 (as of June 2021).
While Bitcoin is not the only network to do this, it is still the largest, most popular, and most secure network. Lightning networks also make small transactions possible as a layer two applications. Regardless of the amount, being able to conduct borderless transactions is absolutely worth it.
The Value of Bitcoin in Decentralization
Decentralization is one of the core features of cryptocurrency. By eliminating central regulatory authorities, blockchains bring freedom and more power to the user community. Everyone can help improve the Bitcoin network due to its open source nature.
Even the monetary policy of cryptocurrencies works in a decentralized manner. For example, a miner’s job includes verifying and validating transactions, but it also ensures that new bitcoins are added to the system at a predictable, steady rate.
Bitcoin’s decentralization gives it a very secure and robust system. No single node on the network can make decisions on behalf of everyone. Transaction validation and protocol updates both require team consensus, protecting Bitcoin from mismanagement and abuse.
The Value of Bitcoin in Distribution
The Bitcoin network improves its overall security by allowing as many participants as possible. The more nodes connected to Bitcoin’s distributed network, the more value it gets. In distributing a ledger of transactions to different users, there is no need to rely on a single source of truth.
Without the distribution, we could have multiple versions of the truth that are difficult to verify. For example, think of an emailed document that a team is working on. When teams send documents to each other, they create different versions with different statuses that can be difficult to track.
In addition, centralized databases are more susceptible to network attacks and outages than distributed databases. It’s not uncommon to have problems using credit cards due to server issues. A cloud-based system like Bitcoin is maintained by a huge number of users around the world, making it much more secure and efficient.
The Value of Bitcoin in Systems of Trust
Bitcoin’s decentralization is a huge network benefit, but some safeguards are still needed. Getting users to collaborate on any large, decentralized network has always been a challenge. To solve this, known as the Byzantine General’s Problem, Satoshi Nakamoto implemented a Proof of Work consensus mechanism that rewards positive behaviors.
Trust is an essential part of any commodity or item of value. Loss of trust in a central bank is a disaster for a country’s currency. Therefore, to use international money transfer, we must trust the relevant financial institutions. There is more built-in trust in the operation of Bitcoin than other assets and systems and that we use every day.
Bitcoin users, on the other hand, do not need to trust each other. They just have to trust Bitcoin’s technology which has proven to be very safe, reliable and open source for anyone to see. Proof of Work is a transparent mechanism that anyone can verify and check for themselves. It’s not hard to see the value here in creating a consensus that’s almost always error-free.
The Value of Bitcoin When It’s Scary
Built into the framework of Bitcoin is a limited supply of 21,000,000 BTC. It won’t be until Bitcoin miners mine the last coin around 2140. While traditional commodities like oil, gold or silver are limited, we find new reserves every year. These discoveries make it hard to calculate their exact scarcity.
Once we have mined all the BTC, Bitcoin will theoretically deflate. When users lose or burn coins, the supply decreases and can cause price increases. Therefore, holders see a lot of value in Bitcoin’s scarcity.
Bitcoin’s scarcity has also led to the popular Stock to Flow model. The model attempts to predict the future value of BTC based on the total number of shares and Bitcoin mining per year. When tested again, it pretty accurately models the price curve we’ve seen so far. According to this model, the main driver of Bitcoin’s price is its scarcity. By having a possible relationship between scarcity and scarcity, holders find value in using Bitcoin as a store of value. We will discuss this concept in more detail at the end of the article.
Bitcoin’s Value in Security
To keep your invested funds safe, not many other options offer as much security as Bitcoin. If you follow best practices, your money will be extremely safe. In developed countries, you can easily accept the security that banks provide. But for many people, financial institutions cannot provide them with the protection they desire, and holding large amounts of cash can be very risky.
Malicious attacks on the Bitcoin network require possession of more than 51% of current mining power, making coordination on this scale nearly impossible. The probability of success of an attack on Bitcoin is extremely low and even if it did, it would not last.
The only real threats to your BTC storage are:
- Phishing and Fraud Attacks
- Your private key is lost
- Store your BTC in a compromised custodian wallet where you don’t own the private key
By following best practices to ensure the above doesn’t happen, you’ll have a level of security beyond your bankroll. The best part is that you don’t even have to pay to keep your crypto safe. Unlike a bank, there is no limit either monthly or daily. Bitcoin allows users to have full control over their money.
Bitcoin as a Store of Value
Most of the characteristics described also make Bitcoin suitable as a store of value. The US Dollar, Precious Metals, and government bonds are more traditional options, but Bitcoin is gaining popularity as a modern alternative to digital gold. Some of the factors that make something a good store of value include:
- Durability: As long as there is a computer to maintain the network, Bitcoin has 100% durability. BTC is indestructible like cash and it is more durable than fiat currencies and precious metals in fact.
- Portability: As a digital currency, Bitcoin is very portable. All you need is an Internet connection and your private keys to access your BTC account from anywhere.
- Divisibility: Each BTC is divisible into 100,000,000 satoshis, users are allowed to make transactions of any size.
- Reliability: Each BTC or satoshi is completely interchangeable. This allows the cryptocurrency to be used as an exchange of value with others around the globe.
- Scarcity: There will only be 21,000,000 BTC in existence and millions of BTC have been lost forever. The supply of Bitcoin is much more limited than that of inflationary fiat currencies, as the supply increases over time.
- Acceptability: There has been widespread acceptance of BTC as a payment method for companies, individuals and the blockchain industry continues to grow every day.
Unfortunately, there is no neat and simple answer as to why Bitcoin is valuable. Cryptocurrencies have important aspects of many valuable assets, like fiat and precious metals, but don’t fit into an easily identifiable box. It works like money without government support and is scarce as a commodity even though it is digital.
A general lack of understanding and misunderstanding has led some to question whether Bitcoin has any value at all. With words like “Ponzi scheme” and “scam” used, it’s easy to see that some people have unfounded fears. However, Bitcoin ultimately runs on a very secure network and the cryptocurrency has a significant amount of value placed in it by investors and traders and the community.