The crypto market experienced its ‘winter’ phenomena in 2018. At this time, bitcoin’s price took a deep dive. Since 2019, BTC’s recovery is under observation. Several crypto analysts, industry experts, and active traders predicted that in the future, the price of bitcoin could reach the six-digit zone ($100,000) or more per unit.
Against the highs and lows of the leading cryptocurrency, what drives its value and why do people invest in BTC are typical questions in the minds of non-believers and those who are still hesitant to believe that cryptocurrency will prevail in the coming years.
In this guide, we will learn and understand the value behind Bitcoin and crypto in general. As the financial industry turns toward technological advancements, having a viable currency to be accepted as another form of payment method looks promising than before.
- Cryptocurrency, particularly Bitcoin, proves to be valuable.
- Adoption, trust, utility, and scarcity are the key factors that determine Bitcoin’s value.
- Understanding how Bitcoin works as a payment system will let you discover the asset’s innate value.
- Bitcoin represents a new form of currency.
- Bitcoin’s true value lies in its network participants.
Is Bitcoin Valuable?
Within the cryptocurrency world, the crowd is a mix of speculators and true believers. Speculators are those who ride the volatile waves of the market, being prone to panic selling as their mindset is dependent on making money and avoid losing more than what they’ve invested.
On the other hand, those who are true believers react in a more disciplined manner. They might not know what the BTC price would be when it stabilizes, but they wait and expect for it to last. They look beyond the price of a cryptocurrency as they consider it not only as a money-making system but a valuable tool for increasing security and reducing fraud.
After all, both types of people have a perception of Bitcoin’s value. As the oldest-running asset in the block, it has always been a debate between yes and no for answering if BTC is worth the hype or not. Despite the skeptics being doubtful, Bitcoin proves to be valuable.
Bitcoin is pretty much the crypto market, having captured most flows. Other altcoins have largely diminished. The top three #cryptocurrencies ranked by market value are bitcoin, worth $180bn; ethereum, worth $23 billion; and XRP, worth $10 billion. #stocks #markets #economy pic.twitter.com/iaQL2BmK49
— Michael A. Gayed, CFA (@leadlagreport) July 7, 2020
Portfolio Manager and Publisher of the Lead-Lag Report Michael Gayed shared a chart on one of his tweets showing how Bitcoin remains to be the top-ranked cryptocurrency in the market. As he mentioned, “Bitcoin is pretty much the crypto market, having captured most flows.” This results in the market value of BTC reaching $180 billion (at the time of the published tweet).
In line with the discussion of Bitcoin’s value, here are some of the key factors that determine its relevance:
Nowadays, people rely on electronic transactions. Yet, when it comes to huge amounts or international transfers, transactions still take time and require high exchange rates.
As the adoption rate increases, so will the value of cryptocurrencies. To be specific, Bitcoin intends to resolve peer-to-peer (P2P) transaction problems. With a decentralized infrastructure, it makes money transfers quick, transparent, and immutable.
As more industries and merchants start accepting bitcoin as payments, people are becoming more open to the original intention behind the currency: electronic cash. Not limited as an investment tool, bitcoin brings a significant impact on the payment industry.
Bitcoin is based on a trustless environment. In the blockchain, nodes from all over the world are working together to keep the system up and running. That is why millions of miners and traders mine and invest bitcoins.
Similar to how a common product is being sold in a market, the seller has to earn the trust of a buyer to be able to successfully drive a purchase decision. Similarly, those that consider bitcoin as an essential product purchase and use it steadily.
Most certainly, participants of the Bitcoin network hugely influence the price of the asset. Bearing in mind the demand and supply of the world’s largest cryptocurrency, the confidence of those mining and trading bitcoins is a key factor in establishing its long-term value.
The word utility can simply be defined as the capacity of a specific product to be useful, satisfying the needs of a person or its targeted audience. Comparing 2009’s financial scope to a decade after, there’s been a boost in the interest regarding cryptocurrency.
Bitcoin, being the first among the thousands of cryptocurrencies, has been on the lead on the crypto utilization ladder. As thousands of merchants start to cater to cryptocurrency users, bitcoins have been used for various payment transactions and industries.
Indeed, an economic utility can decline as the supply of a service or good increases. In that case, Bitcoin’s utility will not decline as it has a fixed supply of 21 million coins. Undeniably, the greater the demand for the asset, the greater its value will become.
Later on, the low supply rate of Bitcoin is the fundamental reason for how it will maintain its monetary role. New bitcoins are created in every block per 10 minutes, on average. With the bitcoin halving process, the issuance rate is being reduced.
Following Bitcoin’s halving event on May 11, 2020, its inflation rate dropped to 1.8%. Accordingly, bitcoin’s value would gradually increase due to its limited supply. Unlike traditional fiat money that can be printed easily, producing bitcoins costs a lot of electricity and other resources.
Moreover, it is unlike other altcoins that have no supply cap, have low hash rate, and have a small group of people that can do market-making without difficulty.
Explaining Intrinsic Value
Understanding how Bitcoin works as a payment system will let you discover the asset’s innate value. But value is subjective per person and can often be changed based on various circumstances.
By definition, “intrinsic” value refers to the essential value of an asset, commodity, or currency. No need for an additional source to make it achieve its value.
In Bitcoin’s case, its value becomes more prevalent as the market cap increases over time, showing less volatility and increased levels of stability. Eventually, clearer regulatory frameworks will emerge, higher liquidity will be observed, and a stronger infrastructure will be built.
For instance, precious metals like gold and silver sustain commodities with intrinsic value. Although, in the modern era, fiat currencies are the global standard. In addition to that, crypto assets have entered the financial scene, standing to be an efficient alternative to hard cash.
Evolution of Money
Ever since human civilization began, specific modes of payment in exchange for goods and services have been in motion. From traditional barter to cryptocurrencies, society has experienced waves of changes in terms of money.
The first means of payment were made through barter; where you simply have to offer what you have in exchange for something of the same value. Back then, they barter for various harvests and other daily necessities.
Later on, cowrie shells were introduced. But due to lack of denomination and control, its value depreciated indefinitely. As a solution for an easier and faster way to conduct trade, the Song Dynasty in China introduced a new form of payment: paper money.
Until today, the majority of the world still uses cash and coins. As a result of technological advancements that aims to address the payment concerns of the public, credit/debit cards, and even contactless payments have come to light.
In fact, payment offerings are constantly improving, and digital currencies are one of the most prominent innovations yet. Attempting to take the upper hand against fiat, cryptocurrencies provide valuable properties that increase its potential to be widely implemented.
Functions of Currency
The value of bitcoin becomes evident as the greater population uses it as a form of digital money. In essence, Bitcoin has the characteristics of money based on mathematical properties. From these attributes, Bitcoin’s significance can be measured by its growing base of users, merchants, and startups.
Divisibility. A single bitcoin consists of satoshis. One Satoshi is equivalent to 0.00000001 BTC. This level of division is incorporated in Bitcoin’s original code.
Portability. Bitcoins, as well as other cryptocurrencies, can be transferred seamlessly through crypto wallets. Based purely on the internet, it can be sent or received within seconds.
Fungibility. Every bitcoin a person owns has the same corresponding value as another bitcoin. Regardless of who owns it and what block it is a part of, BTC’s worth is interchangeable.
Durability. As long as the Bitcoin network remains to be functioning regularly, any amount of Bitcoin or Satoshi owned by a user can be reused countless times without degrading.
Recognizability. Without a doubt, the majority of people around the world easily know what bitcoin is. In this way, it embodies what cryptocurrency is.
Decentralization. Unlike fiat currencies, no single entity produces and controls Bitcoin. No single person alone can censor, control, or manipulate the network and its transactions.
Accessibility. No verified accounts or several pieces of documents need to be submitted to own or accept bitcoins. Keep in mind that as long as you have your crypto wallet ready, you can access BTC.
Uncounterfeitability. Double-spending is prevented within the blockchain. That being so, every bitcoin transaction is recorded on the ledger and confirmed by trustless nodes aka miners.
Programmability. Code developers programmed digital currencies like bitcoin. Therefore, the community can decide how to modify it.
Generally, no currency can be considered absolutely safe from failures or discrepancies. Bitcoin, and other altcoins, may show a lot of potentials for usage, however, no one is certain on how it will progress. Taking all the positive measures to adopt these are dynamic moves that could be highly beneficial to everyone.
Famously known as digital gold, Bitcoin serves the functions of money as it continues to penetrate commercial and economic industries:
Medium of Exchange. In reality, people use bitcoin to buy goods and services. More and more stores are deploying flexible payment methods that mainly accept BTC, ETH, and others.
Unit of Account. It is clear that Bitcoin can act as a measurement of value. Depending on a specific good/service, there can be a set price in BTC that can be paid through wallet transfer.
Store of Value. Bitcoin retains its value over time. Those who have HODL-ed there way from when BTC was still worth a hundred dollars have obviously seen how it appreciated its price.
Anyone who thinks digital gold isn’t a store value is overlooking the fact that most businesses today are built around digital trust, including the financial system.
-Tom Lee, Head of Research at Fundstrat Global Advisors
Bitcoin may not play all the abovementioned roles perfectly with cryptocurrency integration still a work in progress. Despite this, as a representation of a new form of currency, it surely offers an advantage to those who use it than those who prefer not to or do not have enough knowledge.
Why Bitcoins Have Value?
Network effect is the universality of a currency and the increased value that comes with it. As Bitcoin and cryptocurrencies, in general, become widely used, the more flexible they become. What is more, this will result in a more stabilized value.
Developed to be the first real-life application of blockchain that allows direct, permissionless, and private transfer of wealth, Bitcoin came to prominence at the end of the global financial crisis. As indicated, its value greatly increases as more people use it.
Thus, instead of looking at the price alone, Bitcoin’s true value lies in its network participants. As more people own and use BTC, its distribution expands and from a transaction perspective, the amount of wealth placed into each unit of this asset enables seamless transactions. Furthermore, miners who maintain the network internally affects BTC’s value in proportion to their capability to confirm transactions and generate new blocks.
Bitcoin may not replace traditional money but it certainly can stand alone as a substitute leading to more secure payments, efficient cash storage, and enhanced privacy of business trades.