Bitcoin skyrocketed from $1 for 1309.03 BTC in 2009 to over $50,000 for one bitcoin and a total market value of $1 trillion by the end of April 2021. What might not be clear to many, however, is why bitcoin is valuable.
This guide will answer the question: “Why does bitcoin have value?”
In Economics, value is the benefit that a good, service, or asset offers.
The demand for a good, service, or asset determines how valuable one item is compared to another. That means that a currency is considered valuable when it is in high demand.
You can measure the value of the dollar, for instance, by looking at the exchange rate. This method measures how much the dollar can buy in foreign currencies.
Another way to measure the value of the dollar is through Treasury notes. High demand for Treasury notes increases the value of the dollar.
Lastly, you can measure the value of the dollar by considering the number of dollars that foreign governments hold in their reserves. The more dollars they hold, the lower the supply. As a result, the dollar becomes more valuable.
From this example, it is clear that demand and supply are the main factors that drive the value of money and other assets.
Demand and supply are the drivers of Bitcoin’s value. Satoshi Nakamoto created Bitcoin with a limited supply of 21 million units, providing scarcity.
Moreover, he/she/they gave the world the first-ever functioning peer-to-peer money where intermediaries like financial institutions are not required. As a result, bitcoin users can transact directly with each other, reducing the extra cost and delays common when financial intermediaries are involved.
While banks operate within certain hours during working days, bitcoin is a 24/7 currency. It is also borderless, meaning that people from anywhere in the world can transact with each other seamlessly. By providing these benefits, bitcoin has become a currency that people need, hence creating demand.
Bitcoin is also in demand because it is censorship-resistant. That means that no one can actually prevent you from holding bitcoin. Governments can regulate crypto exchanges where people buy and trade bitcoin, but they cannot modify the protocol without controlling more than half of the network’s computing power. To gain and retain this computing power, a government or organization would need to invest more than all the other miners in the world.
What’s more, the use of bitcoin donations during the #EndSARS campaign in Nigeria proves that bitcoin is a great alternative when governments or regulations attempt to censor traditional payment methods.
Bitcoin as a store of value drives further demand. Many people are investing and holding bitcoin because they believe that its value will increase over time. In the face of an economic crisis, bitcoin can act as a safe haven asset as well. For instance, people can use bitcoin as a hedge against a weakening local currency.
Bitcoin also has value because it has essentially all the characteristics of gold, which is why it is often referred to as “digital gold” or “gold 2.0.”
The shared characteristics include:
Unlike gold, however, bitcoin can be easily transported and transferred digitally across borders within minutes and at a relatively low cost.
Trust is a significant factor that determines the value of a currency. No one can use a currency if they do not trust in its stability and usefulness. For example, one of the reasons Zimbabwe’s currency failed was because Zimbabweans had little trust in it.
Nowadays, bitcoin supporters are not just people that are unhappy with the traditional financial system. Conventional financial institutions are embracing bitcoin too. Numerous Wall Street firms and publicly-traded companies are adding bitcoin into their investment portfolios or onto their balance sheets. That means that more and more people (and companies) are beginning to trust bitcoin, especially as a store of value.
Adoption plays a major role in measuring the value of a currency. People are more likely to accept a currency that is extensively accepted than the one used by a handful of people.
While bitcoin’s adoption is not yet universal, its popularity is growing as transactions soar. The total number of bitcoin transactions has been consistently increasing since 2013, according to data from Blockchain.com.
Bitcoin has value because it provides unique benefits that might have seemed impossible to most people before the cryptocurrency launched in 2008. It gave people a chance to control their own money at a time when the world was facing a global financial crisis.
More global economic strife could occur in the future, when it could be safer if you have not stored all your money with a centralised organisation, like a bank that could collapse.
Bitcoin has attracted plenty of support during its short period of existence. Given time, it could garner more users and supporters, which will likely push its value up even further.
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