What Gives Bitcoin Value? CoinFlip Explains
If you've begun to dip your toes into the world of bitcoin, you've probably wondered how it has any value. Over the last year, bitcoin's value has increased from $7,297 to more than $58,000 in November 2021. How did bitcoin achieve this growth? Where does the value come from? Is bitcoin's value real? Today we are explaining how bitcoin's value is generated and more.
To put the value of bitcoin into context, we must first consider other stores of value used in society. A store of value is defined as an asset, commodity, or currency that maintains its value without depreciating. It can be saved, retrieved, and exchanged in the future without deteriorating in value.
What makes gold valuable?
Historically, gold has been one of the most prominent and widely used value stores. Have you ever considered what makes gold valuable? The simple answer to this question is this: because people say it does. Gold is relatively easy to use. For thousands of years, people around the globe have agreed that it's valuable. Plus, It can be used beyond a medium of exchange by being melted into jewelry and other things. Gold has held up as a medium of exchange for centuries because there is a large but finite supply. In other words, gold is scarce.
Scarcity increases the value of an object thanks to the economic law of supply and demand. This law dictates that the more people desire a specific object that is difficult to obtain due to scarcity, the price of that object increases because people are willing to pay a premium. Throughout history, gold has been desirable and in demand and has been characterized as a high-value commodity.
What makes the US Dollar valuable?
Today, the most popular store of value is money like the US Dollar. What gives the US dollar value? In the past, the US dollar was directly linked to gold - known as the gold standard. With the gold standard, the United States agreed to convert paper money into a fixed amount of gold. They would set a fixed price for gold, and this price was used to determine the value of the currency. So, if gold were worth $500 an ounce, then a dollar would be worth 1/500th of an ounce of gold.
However, the United States abandoned the gold standard in 1971 and replaced it with fiat money. Fiat money is money that a government issues and is controlled by central banks that print money and oversee monetary policies. Currently, all national currencies are fiat currencies, including the Euro, Chinese Yuan, and British Pound.
The value of fiat currencies are determined by trust and trust alone. The more stable a government is, the more confidence is instilled in the central bank and its ability to govern the currency. Conversely, if a government loses trust, you will see the value of its currency plummet.
What makes Bitcoin valuable?
Bitcoin generates value much in the same way that gold and fiat currencies do - through widespread consensus that it is, in fact, valuable. Similar to fiat currencies, part of bitcoin's value is generated by user trust.
Bitcoin was created as an alternative to traditional money through blockchain technology and mining. Unlike fiat currency, bitcoin is not governed by a central party. Instead, it is run by blockchain technology - a decentralized global network of computers that rely on cryptography. Blockchain technology is a transparent system that ensures that bitcoin cannot be tampered with or changed by anyone or authority.
Since bitcoin's creation, miners have been investing their time and computational power into the cryptocurrency. This initial investment by miners, paired with the transparency of blockchain technology, helped to create a snowball effect of trust over time. As confidence in bitcoin grows, demand grows alongside it as more people decide they want to invest.
You may have heard bitcoin referred to as digital gold. One of the reasons for this nickname is because, like gold, bitcoin is scarce; there will only ever be 21 million bitcoins to exist. As bitcoins become more in demand, they are more challenging to obtain, generating a higher price.
Bitcoin also has a high level of usability. It can be used by anyone, anywhere in the world. Transactions on the bitcoin network are relatively fast - much faster than sending gold around the globe or converting fiat currencies between nations. Beyond the coins themself, bitcoin's foundational technology - the blockchain - can be applied to many different industries, giving bitcoin a much higher utility rating.
Bitcoin has value because people trust its technology and its use as a store of value. This trust grows over time as more people learn about the benefits of bitcoin and blockchain. Bitcoin's scarcity adds further value because as more people buy into bitcoin, the harder it will become to obtain. We are already seeing bitcoin shortages today as institutional investors are quickly buying up all freshly mined coins.
Bitcoin and the COVID-19 Crisis
Part of bitcoin's massive growth period over the last year can be attributed to the effects of the COVID-19 crisis. Coronavirus forced countries around the globe into lockdown, halting economic activity for weeks and months. As this happened, confidence in the global financial system plummeted, and investors looked for an alternative way to store their funds.
For the United States, combatting this uncertainty came in the form of unprecedented stimulus measures. To pay for these measures, the Federal Reserve had to print new money, thereby increasing the money supply. An increase in the money supply usually leads to a rise in inflation and US dollar devaluation. Fearful of this inflation and devaluation, many investors sought an alternative solution - bitcoin.
Over the last year, bitcoin has solidified its role as a safe-haven asset for periods of economic uncertainty - further solidifying trust and generating value. Major corporations like Tesla and Microstrategy have been adding billions of dollars worth of bitcoins to their balance sheet, adding to bitcoin's scarcity and difficulty to obtain.
Bitcoin's value can be boiled down to scarcity, utility, and trust, just like any other store of value. Of course, this is a very simplistic look at monetary value. There are other factors to look into like durability, fungibility, scarcity, divisibility, and recognizability - all of which are bitcoin characteristics. Most of all, bitcoin's value comes only and directly from people willing to use it and accept it as a form of payment. As bitcoin becomes more widely accepted as a payment method, I think we will see bitcoin's value continue to grow.
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