Why Does Bitcoin Have Value?

Since the announcement of Bitcoin by its anonymous inventor Satoshi Nakamoto in 2008, the digital currency has taken its investors on a monumental journey. More than likely, you’ve heard about Bitcoin’s meteoric price action but have you ever caught yourself wondering what it is that provides Bitcoin value?

In this article we’ll take a look at the properties of Bitcoin that make it a desirable asset for so many people worldwide.

What is Bitcoin?

To quote Satoshi’s white paper, Bitcoin is “A Peer-to-Peer Electronic Cash System”. In other words, a form of digital money, that runs on its own independent computer network. Within the network, users can transfer value between themselves, without the need for a central organization to oversee their transactions.

In order for a currency to be considered money, a few basic properties need to be met:

• Store of value
• Unit of account
• Medium of exchange

Bitcoin just so happens to tick all three boxes:

• Like precious metals, bitcoins do not perish. As the Bitcoin network is decentralized, nobody can confiscate your coins.
• Each bitcoin is divisible into 100,000,000 sub-units (called satoshis). This provides the flexibility to price cheaper items, regardless of any further growth in Bitcoin’s price.
• Bitcoins can be sent to anyone, anywhere, at the speed of electricity.

How Does Bitcoin Have Value?

Given its volatile price, using Bitcoin as a unit of account can be challenging. This is a natural phenomenon for an emerging technology that aims to find its product market fit.

In recent years however, Bitcoin has earned its reputation as digital gold, proving to be a valid and reliable store of value. Look no further than the emigration crisis in Eastern Europe for examples of people who have fled their countries overnight with nothing but a digital wallet to secure their wealth.

This trust in Bitcoin’s qualities as a store of value has grown the asset class to a considerable portion of gold’s multi-trillion dollar market cap.

The decentralized blockchain network upon which bitcoin reside provides additional value to the currency. Bitcoin runs on proof-of-work, a resource-intensive protocol that maintains the integrity of the network. Any bad actors wishing to influence the system would need to deploy an increasingly larger amount of capital and computing infrastructure to gain a 51% majority stake of the network.

Will Bitcoin Always Be Valuable?

The short answer is nobody knows, just as nobody knows whether the Dollar or the Euro will still be here in 100 years’ time. What we can do is identify the qualities that provide Bitcoin value and make assumptions based upon these facts.

Scarcity

There is a hard-capped limit of 21 million bitcoins encoded into the Bitcoin software. By limiting the supply, Satoshi enabled digital scarcity, a unique phenomenon in the copy-paste internet era. This is in stark contrast to the printing of fiat currencies or even the production schedule of precious metals, as seen with the recent gold discovery in Uganda.

Security

The Bitcoin network is arguably one of the strongest IT infrastructures ever seen. Considering the fact that an open-source software has operated this long without being hacked is testament to the strength of Satoshi’s encryption model.

Censorship Resistance

Bitcoin’s blockchain provides an immutable ledger that allows for timestamping transactions and ownership in a way that no centralized system can. Users need only verify, not trust, in order to guarantee the validity of information.

What Lies Ahead for Bitcoin?

In comparison to many other cryptocurrencies, the Bitcoin ecosystem has a reputation for moving slowly. Don’t let that fool you though as there are plenty of noteworthy developments underway for the Bitcoin network, such as:

• Novel payment scaling solutions, like Lightning Network
• An increasing number of miners turning to renewable energy
• Enhanced privacy tools for users
• Further announcements expected of Bitcoin being adopted as legal tender

Final Thoughts

Despite its virtual nature, Bitcoin has proven to be a viable form of money and continues to bring value to people for a variety of use cases. It’s also interesting to note that given the rising energy cost crisis, the production of new bitcoins is currently more expensive than its fair market value, providing investors a significant discount on Bitcoin value.