Why Do Bitcoins Have Value?
Since the cryptocurrency’s inception in 2008, the price of a single Bitcoin has increased dramatically, although with large fluctuations. It reached a record high of over $60,000 in April and has fluctuated since then.
Despite its volatility, Bitcoin continues to attract investors because of its track record of long-term value accumulation. Unlike a stock, which has value because it represents a portion of a company’s ownership, or a bond, which reflects the value of a debt that will be repaid at maturity, it may be challenging to determine the value of a decentralized, digital currency with such a short history.
These fluctuations have the potential to make investors nervous. However, they also raise the question of why bitcoin has value to begin with.
Bitcoin as Currency and Why Currencies Have Value
Because civilizations or groups have elected to utilize them as a means of trade, currencies are considered to have worth simply because individuals believe that they do.
After the end of the gold standard, fiat currencies quickly became the dominant form of money (which mandated that every dollar be backed by a holding of physical gold). Fiat currencies, such as the United States dollar, are not supported by any commodity but yet have value because a larger community or system acknowledges that they do.
You might, for instance, take twenty-dollar cash to the store and spend that money on items, time, and effort equal to twenty dollars’ value. However, the actual piece of paper that you use to make a payment does not have any worth of its own.
Bitcoin, a cryptocurrency invented and published by a pseudonymous entity named Satoshi Nakamoto, has some qualities of a store of value with current currencies such as the United States dollar and the Japanese yen. Among these attributes are the following:
- Supply is limited: the maximum number of bitcoins that will ever be created is 21 million. Never more than 21 million bitcoins will be in circulation, according to a promise. According to the opinions of a significant number of industry professionals, the restricted supply, also known as scarcity, is an essential factor in Bitcoin’s value.
- Not possible to replicate: Due to the fact that Bitcoin mining uses a blockchain system, it is impossible for anybody to fake a Bitcoin transaction. The blockchain is responsible for recording transactions and ensuring that the system continues to function in accordance with the guidelines that were first proposed by Satoshi Nakamoto.
- Easily Transportable: The cryptocurrency known as Bitcoin is straightforward to move around. Transferring money from one exchange account or digital wallet to another is simple and straightforward.
- It Is Easily Transferable: Bitcoins may be moved from one user to another or from one merchant to another with relative ease. To transmit bitcoins to another person, all you need is their public key, also known as their wallet address.
All of these characteristics contribute to the legitimacy of Bitcoin as a form of money, yet, they do not explain the exponential increase in Bitcoin’s price or its distinctive allure as a form of asset storage. After all, savings in cash are not regarded to be a suitable method for investing; in most cases, your United States dollars will experience a significant amount of value increase in an investment vehicle than they would if they are held as cash. Even among cryptocurrencies, bitcoin price is unusual for its worth. It is possible for someone to create a different kind of digital asset that has all of the same features, but this asset may never have any value (in fact, many have tried and failed). Why use Bitcoin, then?
Why Does Bitcoin Have Value?
According to Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, Bitcoin has value “because individuals believe it does. “The speaker said, “And if all of that seems a little chaotic and ridiculous, that’s because it is.”
The widespread expectation that Bitcoin’s future value will exceed its current level drives up demand for the cryptocurrency, which, in a manner similar to that of gold, contributes to the latter’s continuing appreciation in price.
Kiana Danial, the author of “Cryptocurrency Investing for Dummies,” feels that “gold is essentially dirt that humans have determined has value because it is shiny.” “Gold is nothing more than soil that humans have determined has worth because it is bright and somewhat dense.” The value of the $100 bill is not derived from the money itself, as stated in the sentence, “Humans attribute such worth to gold and the banknote you hold in your hand.” That is the value we attribute to it.”
You can’t just go into a shop and immediately transact with Bitcoin as you can with gold, but you can buy it and keep it in your possession. Gold, on the other hand, has a quality that Bitcoin does not — at least not yet — and that is the fact that it has been present for a far more extended period of time, meaning that its worth has been shown more than once.
According to Routledge, you want to know whether your Bitcoin will still be recognized as a Bitcoin a year from now. According to Routledge, the answer to this issue is contingent on the future of blockchain technology and the belief that it will continue to gain public acceptability.
What Do Investors Need to Know?
Since the price of Bitcoin is very volatile, and since it is hard to predict whether it will continue to increase in value or fade into obscurity, it is prudent to invest just a tiny portion of your total assets in Bitcoin. As with any other kind of speculative investment, industry professionals advise limiting cryptocurrency investments to no more than 5 per cent of a portfolio’s total value. In addition, you should never put your other financial priorities, such as maintaining an emergency fund or preparing for retirement, ahead of any bitcoin investments you make.
As with gold, individuals acquire Bitcoin “not because they anticipate being able to stroll into a store and spend it.” but because they anticipate it to keep its value,” Galen Moore, director of statistics and indexes at the cryptocurrency news site CoinDesk, said in a recent interview with Next Advisor.
However, Bitcoin is only one of the hundreds of other cryptocurrencies; it just happens to be the most well-known. When considering investments in other cryptocurrencies, there are various factors to consider.
Bitcoin Value vs Other Cryptocurrencies
Ethereum, the second biggest cryptocurrency by market size, is more comparable to oil if Bitcoin is the equivalent of digital gold. And just as with oil, its worth is tied to the applications it finds in the actual world, even if most people aren’t aware of those applications just yet.
Oil is a valuable commodity in and of itself. Still, there are opportunities to invest in oil futures on the commodities market or in equities representing energy technology and oil firms. Similarly, investors in cryptocurrencies may choose to invest in Ethereum, which operates with its internal currency known as ether.
The Ethereum blockchain provides the foundation for new ideas and developments in cryptocurrency, like decentralized peer-to-peer lending and the sale of digital art using non-fungible tokens (NFTs). According to Routledge, this means that the value of its currency, ether, comes from the access it provides to the network.
Even if Ethereum could have a clearer intrinsic use case than Bitcoin does, this does not necessarily suggest that its value will stay the same or go up in the future. Because there are hundreds of alternative cryptocurrencies, each of which claims to address a different unfulfilled need or opportunity, financial advisors advocate limiting your cryptocurrency investments to the two most prominent cryptocurrencies, Bitcoin and Ethereum. Despite this, all bitcoin assets are unregulated and subject to speculation, and there is insufficient evidence to make any form of precise projections about the potential growth of your investment in the future.