The question of “Why does Bitcoin have value?” is “Why does currency have value?”
The answer is that something valuable must back currency for it to have value. In fact, it might surprise you that fiat currencies have zero intrinsic value. They require a careful watch on supply and demand, and the trust of the people in the government backing it.
Fiat currency is a very new concept of the 19th and 20th centuries. Since there’s no intrinsic value in them, perhaps we should be asking why we use fiat currencies.
We’re going to consider those ideas and other reasons why Bitcoin and other cryptocurrencies have real value. Society is at a tipping point regarding cryptocurrencies, especially Bitcoin. Keep reading to see why it matters to know why Bitcoins have value.
Supply and Demand With a Chance of Trust
Trying to forecast what markets will do has frustrated market makers and investors for centuries. For a long time, the limited-supply commodities that held value backed our currencies.
- Salt
- Gold
- Silver
- Grains
- Animal skins and furs
The first non-barter system of money seems to have come about in Mesopotamia around using grain as the medium of exchange. So lasting was the impression of salt’s footprint on our economic history for millennia that it’s even the root of the word “salary”.
These commodities had intrinsic value since you could eat grain, and salt kept food edible, long past its normal expiration date. Silver is a rare metal that does tarnish but finds use in jewelry because of its high luster, malleability, and easy extraction from ores. It led to silver’s use in easy-to-mint coinage.
Indeed, we still trade-in, and make fortunes from, commodities like oil, gold, and platinum. They’re consumed for their intrinsic value as well as use as a store of value. For example, gold-plated connectors and pins in electronics are popular because of their electrical qualities and lack of oxidation.
Historically, currencies backed by gold and silver are less volatile than fiat currencies. However, that doesn’t mean that they are immune to hyperinflation and other issues fiat currencies face.
What about cryptocurrencies, and specifically, why do Bitcoins have any value?
Does Bitcoin Meet Trust and Supply Requirements for Value?
In the case of Bitcoin, it does actually have an intrinsic value. It isn’t only worth something because we say it is. In fact, it took 10 months for Bitcoin to gain its first valuation from its inception. During those 10 months, something special happened.
People tested Bitcoin for all it was worth.
Does it transfer peer-to-peer as it says? Is it truly transparent? Is my identity hidden, or does the network leak my identity somehow?
Bitcoin increased in value by about 1300% to equal a single dollar after 18 months. This is because it had a limited supply that no one could artificially obtain, and the user could trust the network.
The first ten months established answers to those questions and more. But, at the same time, the following eighteen months built its “use value” as renowned economic giant Ludwig von Mises would call it.
Bitcoin has a cap of 21 million Bitcoin which will likely be fully mined around the year 2140. Thus, there will never be more Bitcoin than 21 million, and not all of that will be circulating at one time.
We have proven through use that we can trust it. It is transparent, secure, fungible, and immutable.
Divisible With Liberty and Justice for All
Almost every currency with any clout divides into “cents” or their language equivalent.
Being able to divide your currency is an important ability, which Bitcoin shares. One Bitcoin is currently a smidge shy of $32,496 in value as of publishing this story, and by the time you read this, the worth of BTC will likely have changed. So it’s unlikely you’ll want to buy an egg or pack of gum with it.
However, Bitcoin divides by eight decimals to the smallest denomination, a “Satoshi.” Satoshis get their name from the pseudonymous founder of the Bitcoin protocol, Satoshi Nakamoto. If there’s a need for it, a theoretical 16 digits can divide a Bitcoin further.
It’s unlikely to ever be needed, but if it is it’s a veritable flick of a switch away. This divisibility allows for microtransactions even if BTC reaches a $1,000,000 valuation.
Compare that with needing to prepare plates and engravings for a new series of “real” money to go to mint. It doesn’t break the bank, so to speak, but the overhead is continuous.
Facilitating transfers on Bitcoin embeds that price in mining. As a result, those costs (CPU and energy) reduce over time and will reach a lower cost than making physical cash.
Bitcoin Is Useable, Portable, Durable, And Secure
The last four points surrounding traditional ideas of valuable currency are:
- utility
- transportability
- durability
- counterfeitability
Notice we say traditional currency because you must remember that fiat currency has no intrinsic value. This is the biggest accusation against Bitcoin, yet fiat currencies have been one of our greatest financial inventions and blunders.
Bitcoin’s transportability is high for a variety of reasons, not the least of which being that it relies on the internet to function. That being said, Bitcoin transmission and initiation over radio waves recently occurred across a distance of over 7km, and your secret key can even be on paper.
If simple radio waves can do this, it opens poor populations up to cryptocurrencies. We can even use USSD to help level the field.
You don’t need to be face-to-face to complete a transaction or carry anything from one place to another. Instead, it takes minutes to complete a transaction, with hopes that in the future more transactions will take place per block using new innovations.
Since there’s no physical Bitcoin to represent, it has the highest transportability of any currency up to its birth.
Contrast this with fiat currency, the U.S. Federal Reserve already credits and debits banks electronically. It is then printed as the banks lend it out to the public.
They don’t use a blockchain system but do use encryption. If the US dollar begins using blockchain verification in the back end it has become a hybridization of a cryptocurrency.
The innovation is not in a currency that is digital or even as portable as Bitcoin is, the innovation is what it’s made of (not code).
Bitcoin’s Case for Utility
Bitcoin itself is only a currency. However, its inventor built it on an elaborate check-and-balance system called a blockchain, a verification system used in a proof-of-work ledger that is open to everyone on the internet, anytime.
The wallet addresses don’t have names and sometimes they can be traced and attributed to certain individuals, so we call it a pseudonymously private system. If you keep your wallet address a secret, your identity remains a secret.
Without the innovation of blockchain encryption, the inherent security of the system would be compromised by hackers and the likes. In this case, think of blockchain as the backer of the currency the same way we used to make coins of gold and silver.
It is a durable record that will last forever, is impossible to counterfeit, and requires little effort on the part of those in the transaction. Even better, in the case of security, there doesn’t have to be a trusted third party like a government.
Why Does Bitcoin Have Value? The Breakdown
Fiat money has no utility except as currency. Blockchain technology is now used in untold numbers of applications beyond finance, much like gold, oil, salt, silver, and others.
Fiat money is not transportable. We carry debit and credit cards so we don’t have to carry paper and coins, ingots of gold, or jewelry, which can be stolen. Bitcoin’s address is the only thing you need to store, the ledger is worldwide and keeps a record of who owns it.
Fiat money isn’t durable. Paper money has an average lifespan of six years before it’s unusable. In countries like Vietnam and Cambodia where it’s frequently used, they won’t take it unless it’s crispy.
This is because damaged money is highly counterfeit-able. Bitcoin, on the other hand, is not physical and cannot be broken. It’s also a feat of mathematical prowess that cannot be counterfeited within any sense of reason.
Bitcoin has only one area where it doesn’t beat out fiat currency, hands down.
Most currency (unless a pure commodity) is backed by a government and has a quality of sovereignty added to it. This is especially true of fiat currencies, which are only backed by sovereignty.
The fight against Bitcoin is instigated and promoted because governments would lose their greatest power. Fiat currency gets its adoption and uses because governments tax in the fiat currency they back.
Because Bitcoin is 100% decentralized, the power is with the people.
How to Cash In On Bitcoin
So what if someone asks you, “Why does Bitcoin have value?” What will you say?
We know you’ve got it now, but it isn’t an idea that’s easy to wrestle with. It even takes financial and economic experts years to come to grips with Bitcoin.
Now that you know it, how can you benefit? ByteFederal ATMs are widely available on- and off-ramps to Bitcoin and other cryptocurrencies. Using the Bitcoin ATM even gives you access to ownership of real physical gold vaulted in Switzerland.
Want to know how you can cash in? Check out the closest ATM near you right now!
