Summary

Bitcoin’s value is derived from a variety of different attributes. Ultimately, the value of cryptocurrencies and fiat currencies comes from "trust." As long as society trusts the fiat currency system, money will always have value. The same goes for Bitcoin: it has value as long as users trust it, but there are more factors to consider.

Unlike legal currency, Bitcoin is not subject to central bank supervision, and its decentralized architecture has given rise to a unique financial system. Blockchain technology brings security, practicality, and many other advantages while subverting traditional global value transfer methods. Analyzed from many aspects, Bitcoin can also be used as a means of value savings similar to gold.

Introduction

For cryptocurrency beginners, the biggest difficulty is Find out how and why cryptocurrencies like Bitcoin (BTC) have value. Bitcoin is a digital token that is not backed by an actual asset, and the concept of mining is confusing. In a sense, mining creates new Bitcoins out of thin air. However, successful mining requires huge investments. How does all this give Bitcoin value?

Imagine the currency we use every day. These banknotes no longer need gold or assets to back them up. Thanks to banks' fractional reserve system, the funds we borrow are often just a string of numbers displayed on a screen. Governments, as well as central banks such as the Federal Reserve, can issue new money and increase the money supply through economic mechanisms.

Although there are obvious differences, Bitcoin, as a digital currency, still has certain similarities with the fiat currencies we are used to. So, before we delve into the cryptocurrency ecosystem, let’s first discuss the value of fiat currencies.

Why is currency valuable?

In short, trust gives value to money. The essence of currency is a tool for exchanging value. Any item can be used as a currency to pay for goods and services as long as there is consensus among the local community. In the early days of human civilization, a variety of objects served as currency, including stones and shells.

What is legal tender?

Fiat currency is official currency issued by a government. Currently, human society exchanges value through the use of banknotes, coins, and digital amounts in bank accounts (also evidence of personal loans or debts).

In the past, people would go to banks to exchange banknotes for gold or other precious metals. At the time, this mechanism ensured that the value of currencies such as the U.S. dollar was tied to an equal amount of gold. However, the gold standard has been eliminated by most countries and is no longer the basis of the monetary system.

With currencies no longer tied to gold, the fiat currencies used today have no backing. This decoupling gives governments and central banks more freedom to set monetary policy and influence the supply of money. The main characteristics of legal tender include:

1. Issued by a central agency or government.
2. Has no intrinsic value and no gold or other commodities to support its value.
3. There is no upper limit to the potential supply.

Why is fiat currency valuable?

With the removal of the gold standard, currency seemed to lose its value. However, we can still use money to pay for food, bills, rent, and other items. As mentioned earlier, the value of currency is derived from public trust. Only by unswervingly supporting and effectively managing fiat currencies can the government maintain a high level of trust. Once hyperinflation occurs and monetary policy fails, and the public loses confidence in the government or central bank, this trust will collapse—Venezuela and Zimbabwe are two typical negative examples.

Why are cryptocurrencies valuable?

Cryptocurrencies share similarities with standard currency concepts, but there are also some significant differences. While cryptocurrencies like PAXG are tied to commodities such as gold, most cryptocurrencies actually have no underlying asset. Trust still plays an important role in maintaining the value of cryptocurrencies. For example, people realize the investment value of Bitcoin, understand that others also trust Bitcoin, and accept it as a payment system and medium of exchange.

Utility is also an important factor for some cryptocurrencies. Certain services or platforms require utility tokens to function properly. Therefore, services that are in high demand give value to utility tokens. There are many types of cryptocurrencies and situations vary. The value of each token or project actually still depends on its own characteristics.

We summarize the characteristics of Bitcoin into the following six categories: practicality, decentralization, decentralization, trust system, scarcity and security. Details will be discussed later.

What is intrinsic value?

Many discussions about the value of Bitcoin revolve around whether it has intrinsic value. What does it mean? Let’s take the commodity of oil as an example. It is an important resource for the production of energy, plastic products and other materials, and contains huge intrinsic value.

Stocks represent an equity stake in a manufacturer or service provider's company and also have intrinsic value. In fact, many investors perform fundamental analysis with the goal of calculating the intrinsic value of an asset. Fiat currency has no intrinsic value either, it is just a piece of paper after all. As we know, its value comes from trust.

There are many investment options with intrinsic value in the traditional financial system, such as commodities and stocks. The exception is the foreign exchange market, where trading revolves around fiat currencies and traders can often profit from short- to medium-term exchange rate movements. So, what about Bitcoin?

Why is Bitcoin valuable?

The value of Bitcoin is a matter of opinion. Some people believe that the market price of Bitcoin is equal to its own value, but this view does not accurately answer our question. What matters is why people decided Bitcoin was valuable in the first place. Let’s take a deeper look at the characteristics that give Bitcoin its value.

The practical value of Bitcoin

One of the great advantages of Bitcoin is that it does not have to rely on any intermediary institutions and can be used anywhere in the world. The world moves large amounts of value quickly. While Bitcoin has higher fees for small transfers, transfers of millions of dollars can be much more cost-effective. Below is a transfer worth approximately $45 million for less than $50 (as of June 2021).

While there are many networks with this utility, Bitcoin is the largest, most secure, and most popular. As a Layer 2 application, the Lightning Network makes micro-transactions a reality. In fact, regardless of the amount, borderless transactions are where the real value lies.

The decentralized value of Bitcoin

Decentralization is a key feature of cryptocurrency. By circumventing central agency regulation, blockchain creates greater autonomy for community users. The open source nature of Bitcoin determines that everyone can contribute to improving the Bitcoin network.

Even the cryptocurrency's monetary policy operates in a decentralized manner. For example, a miner's job involves verifying and validating transactions while ensuring that new Bitcoins are added to the system at a predictable and stable rate.

Decentralization makes Bitcoin a robust, safe and reliable system. No node in the network can make decisions based on personal will alone. Transaction verification and protocol updates require group consensus to prevent Bitcoin from being mismanaged or abused.

The decentralized value of Bitcoin

The Bitcoin network allows as many users as possible to participate and continue to improve Overall security. The more nodes connected to the Bitcoin distributed network, the greater the value of Bitcoin. The transaction ledger is distributed among different users without relying on a single source of truth.

Without such dispersion, it would be difficult to verify multiple versions of the truth. Imagine a team working together to email a document. As long as the file is transferred between team members, they can create different versions in different states, leaving no trace of them.

In addition, centralized databases are more vulnerable to cyber attacks and power outages than distributed databases. Server failures also occasionally result in poor credit card usage. In comparison, a system like Bitcoin is based on cloud technology and is jointly maintained by thousands of users around the world, which is undoubtedly more secure and efficient.

Bitcoin’s trust system value

Bitcoin’s decentralization is a huge network advantage , but some safety guarantees are still needed. Convincing users to collaborate in large decentralized networks is no easy task. In order to solve the so-called Byzantine Generals Problem, Satoshi Nakamoto implemented a proof-of-work consensus mechanism that rewards users who respond positively.

Trust is an important component of any valuable item or commodity. If the public loses trust in the central bank, the country's currency will suffer a catastrophic blow. In the same way, if we make international remittances, we must trust the relevant financial institutions. People naturally place a higher level of trust in the workings of Bitcoin than other systems and assets used every day.

However, Bitcoin users do not need to trust each other, only the Bitcoin technology. The technology is proven, reliable and secure, and the source code is open to everyone. Proof of work is a transparent and open mechanism that allows everyone to self-examine and verify. It is not difficult to see that its value is reflected in its ability to generate a consensus that is almost error-free.

The scarcity value of Bitcoin

The limited supply within the Bitcoin framework is 21 million. When Bitcoin miners mine the last Bitcoin around 2140, no more new coins will be produced. While supplies of traditional commodities such as gold, silver and oil are limited, new reserves are discovered every year. These new discoveries make it impossible to accurately calculate their scarcity.

Theoretically, once Bitcoin is completely mined, deflation should occur. Users losing or destroying Bitcoins causes the supply to decrease, driving the price up. Therefore, holders firmly believe that Bitcoin is extremely valuable in terms of scarcity.

The scarcity of Bitcoin has also given rise to the popular stock-to-flow ratio model. This model looks at annual mining volume and total inventory to try to predict the future value of Bitcoin. Backtesting has proven that it can simulate past price curves very accurately. According to the model, Bitcoin’s scarcity is the main driver of price. After untangling the underlying relationship between price and scarcity, holders realize the value of Bitcoin as a value-saving instrument. We will explore this concept further at the end of the article.

The security value of Bitcoin

Safety of investment funds In terms of security, Bitcoin is indeed better. As long as you operate it properly, your funds are absolutely safe. In developed countries, ensuring the safety of funds is a natural responsibility of banks. However, many people believe that financial institutions cannot provide adequate protection measures and holding large amounts of cash is risky.

To carry out a malicious attack on the Bitcoin network, the computing power of criminals should exceed 51% of the current mining computing power. Cooperation on such a scale is almost impossible. Even if an attack does occur, the entire process will not last long, and the probability of succeeding is extremely slim.

The only real threats to Bitcoin savings are the following:

1. Fraud and phishing attacks
2. Loss of private keys
3. Saving Bitcoins in a compromised escrow wallet without a private key

Follow the best strategies to ensure that this does not happen. This level of security is far better than even a bank. And the best part is there are no fees for cryptocurrency security. Additionally, unlike banks, there are no daily or monthly limits for cryptocurrency transfers. Users have full control over their Bitcoin funds.

Bitcoin as a value savings tool

Most of the characteristics introduced above prove that Bitcoin is ideal for value savings tool. Precious metals, U.S. dollars, and government bonds are traditional ways of storing value, and their modern alternatives, Bitcoin, are known as "digital gold" and are constantly increasing their influence. A quality value-saving instrument has the following advantages:

1. Durability: Bitcoin is 100% durable as long as there are computers maintaining the network. In fact, Bitcoin cannot be destroyed like paper cash, and its durability is better than fiat currencies and precious metals.
2. Portability: Bitcoin is a digital currency and its portability is self-evident. As long as you are connected to the Internet and have a private key, you can access Bitcoin assets anytime and anywhere.
3. Divisibility: Each Bitcoin can be divided into 100 million satoshis, and users can conduct transactions of any size.
4. Fungibility: Each Bitcoin or satoshis are interchangeable with similar assets. This attribute has propelled cryptocurrencies to become a medium of value exchange on a global scale.
5. Scarcity: The supply of Bitcoin is limited to 21 million, and millions have been permanently lost. The supply of Bitcoin is much lower than that of an inflated fiat currency, whose supply will increase over time.
6. Acceptability: Individuals and companies have widely adopted Bitcoin as a payment method, and blockchain technology continues to develop.

For an in-depth understanding of this topic, please readIs Bitcoin a Store of Value? 》

Summary

Unfortunately, regarding There is still no simple and clear answer to why Bitcoin has value. Compared with precious metals and fiat currencies, cryptocurrencies also share the key attributes of high-value assets, but they cannot be easily classified into the same category. Cryptocurrencies have no government support. Although they are digital currencies, they are as scarce as commodities.

A few people lack common sense and are prejudiced, suspecting that Bitcoin is worthless, and even regard it as a "fraud" and "Ponzi scheme". This is obviously a baseless panic. cause trouble. All in all, Bitcoin operates on a very secure network and has a fairly high value placed on it by the community, investors, and traders.