May 9, 2022 5:56 pm in Bitcoin

What Makes Bitcoin Valuable?

Summarizing the components that affect the value of something is a challenging task. When determining which stock to buy, investors frequently consider the value of a company’s fundamental or underlying assets. Still, commodities like gold and diamonds are rare and never go out of style. As many know it, Bitcoin, the king of all cryptocurrencies, is the most valuable in the blockchain today. What makes it so valuable?

Bitcoin Economic Overview

Since its debut, Bitcoin prices have been volatile. According to CoinDesk, there was a considerable spike in Bitcoin prices in 2017, with prices starting at less than $1,000 and rising to over $ 19,000. After that, there was a significant drop in 2018, followed by a stabilization in 2019.

Bitcoin’s value is derived from several distinct factors. Both fiat currencies and cryptocurrencies have value in terms of trust. Money will continue to be valued as long as society relies on the fiat money system. The same may be said about Bitcoin. It’s worth it because users think so, but there are many other factors to consider.

Bitcoin is decentralized. Unlike traditional money, this structure has allowed it to grow and develop its financial system. Blockchain technology provides a high level of security and a variety of other advantages. It also offers a novel approach to dealing with worldwide value transfer. In many ways, Bitcoin is akin to gold as a store of value.

Fiat Currency

Any currency issued by the government is known as fiat currency. Paper cash, coins, and digital numbers on bank accounts are all used in modern culture to exchange value and determine how much credit you have. People used to be able to go to the bank and swap their fiat currency for gold and other precious metals.

In the past, this method stated that the value of currencies such as the US dollar was tied to an equal amount of gold. On the other hand, the majority of countries have abandoned the gold standard, which is no longer the basis of modern monetary systems. Now that the currency is no longer pegged to gold, modern society utilizes fiat money with no backing. Governments and central banks were allowed to set monetary policy and control the money supply due to this separation.

Intrinsic Value

A product’s intrinsic value is its own worth. There are no additional sources needed to add to its value. Any product gains value whenever consumers are willing to pay for it. We now recognize that we may trade fiat currencies for other products and services. Thus, we accept fiat currencies as payment for products and services. Certain currencies have intrinsic value because precious metals like gold and silver back them. Bitcoin, on the other hand, has no intrinsic worth. Because Bitcoin and most cryptocurrencies are not backed by gold or silver, they have no fundamental value. The decentralized nature of BTC and the general society’s faith in it determine its value.

What Makes Bitcoin So Valuable?

Bitcoin has no government backing or a system of intermediate institutions to help it spread widely, making it valuable. Various factors enable this to happen. They include the following:

Utility

The only way to make false Bitcoin is to use a technique known as Double Spend. When a user “uses” or “transfers” the same Bitcoin several times. This, however, is quite unlikely in the case of Bitcoin. For this to take place, a 51 % attack is needed, in which a small group of miners control more than half of the network’s performance. They can handle most of the network’s performance and tamper with records by influencing much of the network’s performance. However, such an attack on Bitcoin would need huge amounts of work, processing power, and money.

Scarcity

The scarcity of Bitcoin is its primary source of value. The question of Bitcoin’s value is akin to that of gold, an asset with characteristics similar to cryptocurrencies. The number of cryptocurrencies available is restricted to 21 million. Bitcoin has considerably higher divisibility than fiat money. After the decimal point, Bitcoin can be divided into eight digits, with Satoshi as the component unit.

The majority of fiat currencies can only be divided into two decimal places. People can still trade cryptocurrencies with little amounts of Bitcoin, even if Bitcoin values rise in the future. The introduction of side channels like as the Lightning Network has the potential to increase Bitcoin’s economic value even further. Bitcoin, like gold, has a limited number of uses, with the majority of them being commercial.

The blockchain technology that underpins Bitcoin has been verified and deployed as a payment mechanism. Cross-border remittances are one of the most efficient use cases for speeding up and decreasing expenses. Countries, developers, and major tech companies are expecting that Bitcoin technologies will mature to the point where it can be used for everyday transactions in the near future.

Marginal Production Cost

According to another view, Bitcoin has its inherent value based on its marginal cost of production. According to economic theory, in a competitive market amongst suppliers of the same product, the market value of that product tends to marginal production costs. Bitcoin prices, according to empirical research, tend to follow manufacturing costs.

Demand

Between November 2011 and November, the number of Bitcoin wallet users grew from 0 to 79 million in 2021, wat the inception of Bitcoin. As the popularity of Bitcoin increases, so does the demand for currency. Keep in mind that when something grows more popular, its demand will rise. Institutional investors, such as financial institutions and countries/ states, began to invest in Bitcoin in 2020 and 2021. Prior to becoming interested in Bitcoin, these investment firms preferred to invest in traditional financial products such as bonds, gold, and exchange-traded funds. The increased demand for Bitcoin from ordinary people and institutional investors has resulted in its unprecedented demand.

Decentralization

One of the most valuable characteristics of Bitcoin is its decentralization. The blockchain will provide the user community with more power and independence by eliminating the central authority. Because Bitcoin is an open-source project, anyone can contribute to its improvement. The monetary policy of cryptocurrency is likewise decentralized.

The miner’s duty, for example, comprises not only transaction confirmation but also guaranteeing that new Bitcoin is introduced into the system at a consistent and constant rate. Bitcoin’s decentralization makes it an extremely stable and secure system. A single network node cannot decide on behalf of the entire network. All transactional validation and protocol modifications require group consensus to prevent Bitcoin from mismanagement and misuse.

Trust System

The decentralization of Bitcoin is a huge benefit for networks, but it still needs to be protected. It has always been difficult to allow users to collaborate on huge distributed networks. Satoshi Nakamoto devised a proof-of-work consensus protocol that encourages positive behavior to overcome the Byzantine Generals’ problem.

Users of Bitcoin do not need to trust one another. They only need to believe in Bitcoin’s technology, which has demonstrated to be highly trustworthy and secure. Its source code is publicly available. Proof of Work is an open system that anyone can check and verify for themselves. It’s simple to see how important it is to reach an agreement within this situation.

Distribution

The Bitcoin network increases overall security by allowing as many users to join. The greater the number of nodes linked to Bitcoin’s distributed network, the more valuable Bitcoin will become. There can be several versions of truth that are hard to verify if propagation is not done. Compared to distributed databases, database management systems are more prone to cyber breaches and malfunctions. It’s not uncommon for credit card transactions to fail owing to server troubles. Cloud-based systems, such as Bitcoin, are far more efficient and safer since they are managed by thousands of users worldwide.

There is no definite answer of why Bitcoin is so valuable. Despite its digital nature, it behaves like money and has the scarcity of a commodity, even though the government does not back it.