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With the recent rise in Bitcoin’s popularity, more and more people seem to be catching wind of the phenomenon that is cryptocurrencies. Still, very few understand what Bitcoin is, where it comes from, and what gives it value.
So, What Exactly Are Bitcoins?
Put simply, bitcoins are randomly assigned sets of unique numbers, each linked to an individual signature, as a proof of ownership.
Often referred to as the first decentralized digital currency, Bitcoin was created by an unknown programmer under the alias Satoshi Nakamoto.
Bitcoin is a peer-to-peer system, meaning that all Bitcoin transactions are made directly between the two parties, without the need for an intermediary.
This allows for a tax-free exchange, in which both parties remain anonymous.
Although the transactions are recorded in a blockchain, they can only be traced back to the wallet ID, and not the wallet holder themselves. Furthermore, you’re not required to give your real name when creating the wallet ID.
As a decentralized currency, Bitcoin is not connected to a central repository or a single administrator.
This makes all transactions quick, easy, and cheap, since they aren’t tied to a governing body or subject to regulation.
Taking all that into account, it’s easy to see why Bitcoin’s quickly growing in popularity.
However, that still leaves a few questions unanswered… Why is Bitcoin worth anything in the first place?
What gives it value? How can a currency that only exists in the digital world even be used as a valid means of payment?
The Economic Value
Perhaps the easiest way to answer these is by taking a look at the very basics of Economics.
Economic value is the maximum amount a consumer is prepared to pay for a product or service in a free market economy. That value is determined by preferences of a given population and the tradeoffs its members make, given their resources.
As such, no product or service has a static, inherent value.
In other words, all value is perceived. We give value to things, based on the economic principles of scarcity, utility, supply and demand.
To put it into perspective, let’s compare Bitcoin to another resource with high perceived value – gold. First off, there is a finite amount of gold which can be found in the Earth. On top of that, it is quite difficult to find, which adds to its scarcity.
As for utility, it is highly durable and guaranteed to maintain its original condition for generations to come.
It’s mobile, in a sense that it can be transferred between countless owners, for thousands of years, without losing any of its properties.
But, most importantly, gold is desirable.
People desire to own gold, and derive great satisfaction from it (mainly in the form of jewelry).
Together, these elements create the perceived value, which is used to determine the price by factoring in the market’s supply and demand.
How Does This Translate To Bitcoin?
Bitcoins have all the characteristics of gold, with the only difference being that they exist solely in the digital world.
Bitcoin’s value, just like the value of gold, comes from the fact that it is rare, durable, desirable, and provides utility.
Just like gold, there is a finite number of Bitcoins that will ever be created, with the cap set at 21 million.
What makes Bitcoin and other CryptoCurrencies go up in value?
Essentially, this means that once all the Bitcoins are distributed among various owners, the only way to acquire the currency would be to exchange it for another (like USD), or trade goods and services for it.
However, scarcity alone does not provide value.
To have value, Bitcoin must also provide utility.
We’ve already talked about the properties which make Bitcoin useful – the speed and ease of transfer, anonymity, the fact that it’s decentralized and free of taxation.
For Bitcoin to maintain its value and be regarded as a valid currency, it also needs to be accepted as a form of payment by a large community. People put trust in Bitcoin due to the belief that they will be able to trade it for goods and services, or exchange it for another currency, in the future.
So, apart from scarcity and utility, the value of Bitcoin comes from the fact that it is accepted as a currency by a large group of merchants and individuals.
The more it is used in everyday transactions by both businesses and individuals, the more people will be willing to put trust in it as a currency, thus adding to its value by increasing demand.
Supply & Demand
Due to its many benefits, the number of merchants around the world that are accepting Bitcoin as a valid means of payment is steadily growing, adding to its usefulness and in turn increasing its value.
Initially, Bitcoin wasn’t worth more than just a few pennies, but as speculators began building up the value, and more people started utilizing this currency, the value has grown exponentially, and a single Bitcoin is currently priced at $4, 374.12 (Aug 28th, 2017).
With 16,5 million BTC currently in circulation, we’re nearing the 21 million cap, after which the production of Bitcoins will come to a halt.
At the current rate, it is predicted that the final number of Bitcoins available will be in circulation by 2033.
Without an influx of new Bitcoins, there is no risk of inflation, and the only way in which the value of Bitcoin can begin to diminish is if the demand suddenly goes down.
However, with a finite supply and a steadily increasing demand for this virtual currency, the value of bitcoin is predicted to skyrocket, with some of the most optimistic investors, miners, and experts speculating that it might even reach 1 million per BTC in the not-so-far future.
Keep in mind that Bitcoin’s value and its price are not equivalent.
The price is directly determined by the market in which it trades, or in other words supply & demand.
Put simply, the interaction between Bitcoin buyers and sellers is what ultimately determines the price of Bitcoin. Another variable that influences its price is the willingness of buyers to pay for the future value of the Bitcoin.
If the market believes that Bitcoins value will increase in the future, they will be willing to pay more for it.
Given the above-mentioned utility of Bitcoin, and the fact that it’s a constantly evolving and improving technology, with possibly multiple other uses to come, the current market trend seems to favor the Bitcoin.
The Future Of Bitcoin
One can only predict how Bitcoin’s value will change in the future, but judging by recent trends and the increasing demand, it’s very likely that it will continue to steadily increase.
As long as the Bitcoin community maintains a high level of trust in the system, the Bitcoin’s value will continue going up.
All things considered, this looks like an ideal time for investors to jump into the exchange markets and cash-in on what could very well be the currency of the future.
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