Bitcoin derives its value from a variety of different attributes. Ultimately, both crypto and fiat currencies have value because of trust. As long as society believes in the fiat system, money will continue to have value. We can say the same for Bitcoin: it has value because users believe it does, but there is more to consider.
Unlike fiat, Bitcoin has no central bank, and its decentralized structure allowed for the creation of a unique financial system. Blockchain technology offers a great deal of security, utility, and other benefits. It also provided a revolutionary way of dealing with the transfer of value globally. In many ways, Bitcoin can also act as a store of value similar to gold.
One of the biggest struggles for newcomers to crypto is grasping how and why a cryptocurrency like Bitcoin (BTC) can have value. The coin is digital, has no physical asset backing it up, and the concept of mining can be very confusing. In a sense, mining creates new bitcoins out of thin air. In practice, though, successful mining requires a very costly investment. But how can all of this make BTC valuable?
Although there are remarkable differences, BTC, as a digital form of money, shares some similarities with the fiat money we are all used to. So, let’s discuss first the value of fiat money before we dive into the cryptocurrency ecosystem.
Why does money have value?
In short, what gives money value is trust. Essentially, money is a tool used to exchange value. Any object could be used as money, as long as the local community accepts it as payment for goods and services. In the early days of human civilization, we had all kinds of objects being used as money - from rocks to seashells.
What is fiat money?
In the past, people could go to the bank to exchange their paper money for gold or other precious metals. Back then, this mechanism ensured that currencies like the U.S. dollar had their value tied to an equivalent amount in gold. However, the gold standard was abandoned by the majority of nations and is no longer the basis of our monetary systems.
- It’s issued by a central authority or government.
- It has no inherent value. It’s not backed by gold nor any other commodity.
- It has an unlimited potential supply.
Why does fiat have value?
Why does crypto have value?
When it comes to Bitcoin, we can narrow it down to six features that we’ll discuss in more detail later: utility, decentralization, distribution, systems of trust, scarcity, and security.
What is intrinsic value?
A lot of the discussion regarding Bitcoin’s worth is whether it has any intrinsic value. But what does this mean? If we look at a commodity like oil, it has intrinsic value in producing energy, plastics, and other materials.
The traditional financial system has many investment options that carry intrinsic value, from commodities to stocks. Forex markets are an exception as they deal with fiat currencies, and traders often profit from short or mid-term exchange rate swings. But what about Bitcoin?
Why is Bitcoin valuable?
Bitcoin’s value in utility
Bitcoin’s value in decentralization
Bitcoin’s value in distribution
By allowing as many people as possible to participate, the Bitcoin network improves its overall security. The more nodes connected to Bitcoin's distributed network, the more value it gets. In distributing the ledger of transactions across different users, there’s no need to rely on a single source of truth.
Without distribution, we can have multiple versions of the truth that are difficult to verify. Think about a document sent via email that a team is working on. As the team sends the document among themselves, they create different versions with different states that can be difficult to track.
Also, a centralized database is more susceptible to cyber-attacks and outages than a distributed one. It’s not uncommon to have issues using a credit card because of a server issue. A cloud-based system like the one of Bitcoin is maintained by thousands of users around the world, making it much more efficient and secure.
Bitcoin’s value in systems of trust
Trust is an essential part of any valuable item or commodity. Losing trust in a central bank is disastrous for a nation's currency. Likewise, to use international money transfers, we have to trust the financial institutions involved. There is more inbuilt trust in Bitcoin's operations than other systems and assets we use daily.
However, Bitcoin users don't need to trust each other. They only need to trust Bitcoin's technology, which has proven to be very reliable and secure and the source code is open for anyone to see. Proof of Work is a transparent mechanism that anyone can verify and check themselves. It’s easy to see the value here in generating consensus that is almost always error-free.
Bitcoin’s value in scarcity
Bitcoin’s value in security
In terms of keeping your invested funds safe, there aren’t many other options that provide as much security as Bitcoin. If you follow the best practices, then your funds are incredibly secure. In developed countries, you can easily take for granted the security offered by banks. But for many people, financial institutions cannot provide them the protection they need, and holding large amounts of cash can be very risky.
The only real threats to the storage of your BTC are:
- Fraud and phishing attacks
- Losing your private key
- Storing your BTC in a compromised custodial wallet where you don’t own the private key
Bitcoin as a store of value
- Durability: So long as there are still computers maintaining the network, Bitcoin is 100% durable. BTC cannot be destroyed like physical cash and is, in fact, more durable than fiat currencies and precious metals.
- Portability: As a digital currency, Bitcoin is incredibly portable. All you need is an Internet connection and your private keys to access your BTC holdings from anywhere.
- Divisibility: Each BTC is divisible into 100,000,000 satoshis, allowing users to make transactions of all sizes.
- Fungibility: Each BTC or satoshi is interchangeable with another. This aspect allows the cryptocurrency to be used as an exchange of value with others globally.
- Scarcity: There will only ever be 21,000,000 BTC in existence, and millions are already lost forever. Bitcoin’s supply is much more limited than inflationary fiat currencies, where the supply increases over time.
- Acceptability: There's been widespread adoption of BTC as a payment method for individuals and companies, and the blockchain industry just continues to grow every day.
There is, unfortunately, no single and neat answer as to why Bitcoin has value. The cryptocurrency has the key aspects of many assets with worth, like precious metals and fiat, but doesn't fit into an easily identifiable box. It acts like money without government backing and has scarcity like a commodity even though it's digital.