Bitcoin’s value is determined by a number of factors. Finally, both crypto and fiat currencies have value because people trust them. Money will continue to have value as long as society believes in the fiat system. We can say the same thing about Bitcoin it has value because users believe it has value, but there is more to consider.
One of the most difficult challenges for newcomers to cryptocurrency is understanding how and why a cryptocurrency like Bitcoin (BTC) can have value. The coin is digital, with no physical asset to back it up, and the concept of mining can be quite perplexing. Mining, in a sense, creates new bitcoins out of thin air. In practice, however, successful mining necessitates a significant investment. But how does all of this add value to BTC?
Why does money have value?
In short, trust is what gives money its value. Money is essentially a tool for exchanging value. As long as the local community accepts it as payment for goods and services, any object can be used as money. From rocks to seashells, all kinds of objects were used as money in the early days of human civilization.
What is fiat money?
Fiat money is money that is issued and legalized by a government. Today, our society exchanges value via paper notes, coins, and digital numbers on our bank accounts (which also define how much credit or debt we have).
People used to be able to go to the bank and exchange their paper money for gold or other precious metals. Back then, this mechanism ensured that the value of currencies like the US dollar was linked to an equivalent amount in gold. However, the majority of nations abandoned the gold standard, and it is no longer the foundation of our monetary systems.
Why does crypto have value?
Cryptocurrencies share some characteristics with our traditional concept of money, but they also have significant differences. Although some cryptocurrencies, such as PAXG, are linked to commodities such as gold, the majority of cryptocurrencies have no underlying asset. Instead, trust plays an important role in the value of a cryptocurrency once again. People, for example, see value in investing in Bitcoin because they know that others trust Bitcoin and accept it as a payment system and medium of exchange.
What is intrinsic value?
Much of the debate over Bitcoin’s worth revolves around whether it has any intrinsic value. But what exactly does this mean? When we look at a commodity like oil, we can see that it has intrinsic value in the production of energy, plastics, and other materials. Stocks have intrinsic value as well because they represent equity in a company that produces goods or services. In fact, many investors use fundamental analysis to determine an asset’s intrinsic value. Fiat money, on the other hand, has no intrinsic value because it is just a piece of paper. As we’ve seen, its worth stems from trust.
Why is Bitcoin valuable?
The value of Bitcoin is a highly debatable topic with many opposing viewpoints. Of course, one could argue that Bitcoin’s market price is its value. That, however, does not directly answer our question. What matters more is why people think it has value in the first place. Let’s delve a little deeper into some of the characteristics that contribute to Bitcoin’s value.
Bitcoin’s value in utility
One of the most significant advantages of Bitcoin is its ability to quickly transfer large amounts of value around the world without the use of intermediaries. While fees can make sending a small amount of BTC relatively expensive, it is also possible to send millions of dollars cheaply. A Bitcoin transaction worth approximately $45,000,000 is shown here, with a fee of just under $50. (as of June 2021).
Bitcoin’s value in decentralization
One of the primary characteristics of cryptocurrencies is decentralization. Blockchains give the community of users more power and freedom by eliminating central authorities. Because the Bitcoin network is open source, anyone can contribute to its improvement.
Even the monetary policy of the cryptocurrency is decentralized. Miners, for example, verify and validate transactions while also ensuring that new bitcoins are added to the system at a consistent and predictable rate.
Bitcoin’s value in a distribution
The Bitcoin network improves its overall security by allowing as many people as possible to participate. The greater the number of nodes connected to Bitcoin’s distributed network, the greater its value. There is no need to rely on a single source of truth when distributing the ledger of transactions across multiple users.
We may have multiple versions of the truth that are difficult to verify if we do not distribute. Consider an email-sent document that a team is working on. As the team circulates the document, it generates multiple versions with varying states that can be difficult to track.
Bitcoin’s value in systems of trust
Bitcoin’s decentralization is a significant network benefit, but it still requires some protection. It is always difficult to get users to cooperate on any large, decentralized network. Satoshi Nakamoto implemented a Proof of Work consensus mechanism that rewards positive behavior to solve this problem, known as the Byzantine General’s Problem. Trust is a necessary component of any valuable item or commodity. Loss of faith in a central bank is disastrous for a country’s currency.
Bitcoin’s value in scarcity
Bitcoin’s framework includes a limited supply of 21,000,000 BTC. When Bitcoin miners mine the last coin around 2140, there will be none left. While traditional commodities such as gold, silver, and oil are limited, new reserves are discovered every year. These discoveries make calculating their exact scarcity difficult.
Bitcoin should be deflationary once we have mined all of the BTC. As users lose or burn coins, the supply decreases, causing the price to rise. As a result, holders place a high value on Bitcoin’s scarcity.
Bitcoin’s value in security
There isn’t many other options that provide as much security as Bitcoin in terms of keeping your invested funds safe. Your funds are extremely secure if you follow best practices. In developed countries, the security provided by banks is often taken for granted. However, for many people, financial institutions cannot provide the necessary protection, and holding large amounts of cash can be extremely risky.
Bitcoin as a store of value
Most of the characteristics already mentioned make Bitcoin an excellent choice as a store of value. Traditional options include precious metals, US dollars, and government bonds, but Bitcoin is emerging as a modern alternative and digital gold. To be a good store of value, something must have the following characteristics:
- Durability: Bitcoin is unbreakable as long as the network is maintained by computers. Bitcoin, unlike physical cash, cannot be destroyed and is, in fact, more durable than fiat currencies and precious metals.
- Portability: Bitcoin, as a digital currency, is extremely portable. To access your BTC holdings from anywhere, all you need is an Internet connection and your private keys.
- Divisibility: Bitcoins are divisible into 100,000,000 satoshis, enabling users to perform transactions of all sizes.
- Fungibility: Each BTC or satoshi can be exchanged for another. This feature enables the cryptocurrency to be used as a medium of exchange with others all over the world.
- Scarcity: There will only ever be 21,000,000 BTC, and millions have already been lost forever. Bitcoin’s supply is much more limited than the supply of inflationary fiat currencies, which increases over time.
- Acceptability: BTC has seen widespread adoption as a payment method for individuals and businesses, and the blockchain industry is expanding by the day.
There is, unfortunately, no single and neat answer as to why Bitcoin has value. Crypto has the key aspects of many assets with worth, like precious metals and fiat, but doesn’t fit into an easily identifiable box. Despite being a digital currency, it functions like money without government backing, and it has scarcity like a commodity.