Why Is Bitcoin Valuable

Bitcoin has value for the same reason fiat currencies do. It is a useful form of money that can effectively facilitate the transfer of value. Just like fiat currencies, Bitcoin is not backed by anything. However, the difference is, fiat currencies are issued and controlled by central authorities, governments, and financial institutions while Bitcoin has no central authority.

Before we look at Bitcoin, let us consider where traditional money draws its value.

Why Traditional Currencies Have Value

A look at the history of money reveals that as long as people agree that something has value, then it does. It is faith and trust that makes money work.

In the beginning, people used a barter trade system where they exchanged products for other products, for example, a cow for wheat. However, this method proved too inconvenient over time due to a lack of divisibility and portability. People then started using materials such as shells and rocks as mediums of exchange. They later graduated to gems and rare metals.

All these forms of money were recently replaced by government-issued fiat currencies, such as the US dollar, which is currently the most trusted form of money. Essentially, people agree on and trust the value that the government places on the legal tender that it issues.

All types of money must have six key attributes to qualify as a useful currency: acceptability, scarcity, divisibility, portability, durability, and resistance to counterfeiting. These qualities enable currencies to have various use cases in the economy        

• Acceptability: People must generally agree on the value of the money. It must be a stable store of value that is accepted by all users. Initially, people used commodities and precious metals because they generally considered them valuable.
• Scarcity: A currency must be limited to maintain its value. Central banks regulated the amount of money in the economy to avoid inflation that destroys the value of money.
• Divisibility: Money should be highly divisible to cover various levels of values. This makes it convenient to use it.
• Portability: Money should be easily transferable to facilitate a quick transfer of value. Fit currencies are easily transferable electronically or through banks.
• Durability: Consistency is a key feature of money. The value of money must not disappear suddenly, since it is a store of value.
• Resistance to Counterfeiting: A currency should be secure, and avoid counterfeiting. Uniformity must be achieved if the currency has to maintain its value.

Back to Bitcoin. Bitcoin checks all the attributes of an effective currency highlighted above.

Valuable Properties of Bitcoin

Scarcity

Unlike fiat currencies and even other commodities, Bitcoin has a fixed supply of 21 million BTC. This ensures that it remains scarce enough to preserve value. While fiat currencies are at risk of uncontrollable inflation, Bitcoin is designed to maintain its scarcity forever. Therefore, once the fixed supply is reached, an increase in demand for Bitcoin will lead to an increase in value since the supply is constant.

Divisibility

Bitcoin is highly divisible. There are 100 million Satoshis (the smallest unit of Bitcoin) in one Bitcoin. Therefore, one Satoshi is equal to 0.00000001 BTC. The level of division can also be into 16 or more decimal places, meaning it has an infinite degree of divisibility.

Portability

Bitcoin is electronic and hence highly portable. It can be transferred through the internet or even radio waves.

Fungibility

Every bitcoin has the same value. Therefore, it can be used interchangeably without losing its value. This makes it a high-utility currency.

Accessibility

Bitcoin is accessible to anyone anywhere, as long as they are connected to the internet. Users do not need verified bank accounts to own or trade Bitcoin. Bitcoin accessibility has made many people believe that it is the best solution to financial inclusion. It is extremely inconvenient to the unbanked and underbanked population globally.

Durability

Bitcoin can be re-used without degrading. Additionally, it is electronic money that does not experience wear and tear.

 Recognizability

Many investors, merchants, and even governments are recognizing Bitcoin. Although only a couple of countries accept it as legal tender, many users recognize and accept it as money. It will gain further acceptability if governments continue to acknowledge it.

Decentralization

Unlike fiat currencies, Bitcoin is not regulated by any central authority. As such, it cannot be censored, controlled, or changed. This gives users high confidence in the currency since it cannot suffer from bad governance by any central authority.

Transparency and Immutability

Bitcoin transactions are transparent and unchangeable. Additionally, the use of blockchain technology helps prevent the double spending problem. Therefore Bitcoin transactions cannot be forged or manipulated.

Programmability  

Bitcoin is highly programmable, meaning it can receive updates to improve its functionality. Traditional currencies are not programmable.

Stability and Store of Value

Stability is the ability of a currency to maintain its value over a period of time. It is a useful feature for any currency that is used as a store of value.

This is the only feature that is still lacking in Bitcoin. The cryptocurrency is still highly volatile. Therefore it is not a good store of value. However, that is likely to change once Bitcoin’s market cap grows and it attains high liquidity.

The Bottom Line

The above features ensure the effectiveness of Bitcoin and give users trust and confidence in the currency. It is the trust and confidence of people in Bitcoin that gives it its value.