Problems with understanding the value of bitcoin
I am sure even if you are not a tech guy or a bitcoin investor that you have heard on the news about its high increase in value the last years. You don’t understand how this digital currency for “nerds” and “criminals” got so much value and its price is thousands of dollars now. The first thing an average person thinks is that bitcoin is a bubble which soon will blow and the price will drop near to zero. But is this really the case, does bitcoin have no value? Bitcoin was officially created at 2009 and it is still alive with a value no one could ever guess in the early beginnings. We will examine what are the exact reasons for this rally and what drives this extreme growth. But first, let’s examine what gives value to normal currencies and assets.
Normal currencies and how did they get their value
Normal currencies such as dollar or euro are backed by the central bank (of each country or economic union) and the central government. The currency itself holds no value. The real value comes from trust and here is why. You know that your dollar (or other currency) will be accepted on any store because our governments and as societies, we decided to accept it that way. This leap of faith was done firstly by each government since they accept only the official country’s currency as a way to pay your taxes and they pay the government employees with that too. Businesses follow with the same approach and lastly the average consumers that use the official currency to purchase good and services.
As you already understand a currency succeeds if the people trust it and in the same time they think that rest of the world will trust it too. In reality there is no Intrinsic value in dollar , you can consider it as a simple paper. Apply now the same principals in bitcoin. This digital currency exists on the internet only and there is no physical presence. This fact doesn’t mean that can’t have any value. It only needs enough people to trust it and use it. Ask yourself, does that happens with bitcoin?
Bitcoin Intrinsic value
The answer is that already many people store it as an investment or use it in usual transactions (in a lesser degree). The most successful cryptocurrencies exchange (coinbase) has already over 13 million users. There are also other “players” such as miners (thousands of them) that have economic incentives to keep the project alive. Don’t forget the big number of developers that contribute and improve bitcoin code for idealistic reasons or for economic ones too. There are also many companies (such as cryptocurrencies exchanges) that they have huge profits and they want bitcoin and similar cryptocurrencies to succeed.
For me, bitcoin intrinsic value comes from its use cases and the unique valuable advantages that it has. You will understand more in the next paragraphs.
Use Cases of bitcoin :
1.) Medium of exchange: Meaning that anyone can get paid or pay for some good or service.You can send it to any person and any country as long as there is internet available. Especially comparing with current options the transfer by using bitcoin is much quicker than using wire transfer options (SWIFT).In the near future with the new technologies introduced (lightning network), the transactions will be instant.
2.) Store of Value: Instead of holding your wealth in dollars or gold you can keep it in bitcoin. For me, at that moment this is the best use case for bitcoin. I know what you are thinking, the price fluctuates a lot so bitcoin can’t be a good candidate for that use case. I believe you are wrong since in long-term price increases and your “real” money value always decreases because of inflation. Keep in mind that the price of bitcoin in December of 2012 was $13 and now it is a couple of thousands.
1.) Digital scarcity: There will be only 21 million of them in existence (that’s guaranteed based on the issuance model of bitcoin).This fact is very important since it gives a lot of value to bitcoin. In contrast with usual currencies, the supply will be almost fixed. For the normal currencies, you can’t predict how many will be issued by the governments in the future. Whatever is rarer is usually more valuable too. It’s guaranteed that the normal currencies will have less value in long-term comparing with today. You can also think diamonds as an example of what happens when a material is rare or a unique piece of art (a Pablo Picasso Painting for example). Whatever is more rare and uniqure tends to have a bigger value.
2.) Permissionless: Anyone can have a bitcoin wallet.On the other hand, a certain bank or payment provider can suspend you of its system or can refuse to open an account for you for any reason. You maybe were involved in some protest against the current goverment or support a political party or movement that authorities don’t like. In some countries, the government can directly forfeit your money from your bank if you owe taxes.
3.) Financial Freedom: You are responsible for holding your wealth and you don’t rely on some “good” third party to take care of your money. People can interactly directly without the “approval” of a trusty entity. Of course, with freedom comes responsibility too.
4.) Decentralized: The whole system relies on multiple computers/persons to be functional and secure. The “players” of the ecosystem have economic incentives to keep the system up and running. Please check my article “what is bitcoin” for more details or much better watch some videos from the personalities i mention in that article to understand much more.
5.) Secure: Bitcoin network is running for almost 10 years and no one was able to hack it till now because of the computer science and cryptography techniques that back it. The software is updated frequently by a big community of developers.
Will bitcoin value increase in long term?
Based on what i wrote in Bitcoin Intrinsic value paragraph you need to ask yourself:
Will more people use bitcoin in the future as medium or exchange or store of value?
In my humble opinion yes but of course this is not a financial advice since i am not an expert.Despite bitcoin value fluctuations there is a strong upward trend if you see the price charts in a longer period.Meaning that the interest of bitcoin gradually increases despite some setbacks.There is also a lot of talent and money spent to improve the technology of bitcoin itself or for some other technologies around it that will help for massive adoption.Many mainstream financial companies such as Intercontinental Exchange (owns New York Stock Exchange) are building dedicated platforms for cryptocurrencies (and bitcoin of course) trading.
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