Even if you are not involved in cryptocurrencies yourself yet, you have surely read or heard about Bitcoin at some point in some form of media/news outlet. And like many others, you have probably asked yourself „What the hell is Bitcoin and why exactly does this piece of code have value? Well in case you are still asking yourself the same questions, keep reading and learn about the key aspects that give Bitcoin value!
First and foremost, it‘s important to distinguish between value and price of an asset. To use Warren Buffet‘s words: «Price is what you pay, value is what you get“. So when we refer to the value of digital assets, e.g. bitcoin, we refer to the fundamental reasons for why people are willing to pay a certain amount (e.g. in FIAT money) to receive the digital asset in question. But certainly, the perceived value of a digital asset is a main price determinant for any digital asset, as value drives demand, which in combination with supply of an asset determines its price.
So let’s get into the real deal. Bitcoin (₿) is the first cryptocurrency that has ever been created. It is a decentralized digital currency, which means that it can function without a central bank or single administrator. Also, Bitcoin can be sent from user to user on the peer-to-peer bitcoin network without the need for any intermediaries. Bitcoin was first introduced as an open-source software by an anonymous programmer, or a group of programmers, under the alias “Satoshi Nakamoto” back in 2009. There has been a lot of rumors about the real identity of BTC’s creator, however all of the people mentioned in those rumors have since publicly denied being Nakamoto.
But let’s get into why Bitcoin has value. New bitcoins are only created when blocks of transactions are validated by the nodes involved in the consensus mechanism (also referred to as “miners”). The total amount of bitcoins to be mined and hence ever be publicly available is limited to 21’000’000 bitcoins. Since this is hard coded into bitcoins underlying software code, it’s impossible to alter the amount of Bitcoins to be created. Therefore, in this regard, bitcoin is quite similar to gold or other rare metals, as the maximum supply is limited and “mining” (process of making new bitcoins available) has cost associated to it. Naturally, a miner wouldn’t want to sell a bitcoin for less than it cost him to acquire it (e.g. cost for hardware and electricity). Just like a gold miner would not want to sell the gold he mined without a sufficient compensation for the cost he incurred (labor, tools, etc). Also, just like with rare commodities like precious metals, the limited supply puts additional pressure on the price (which essentially is derived from Bitcoin’s value) if demand is steady or even increasing.
But aside of the similarities to gold and other precious metals, we have to ask ourselves the question: “Why does traditional money have value?” This question is imperative to ask, because Satoshi Nakomoto originally outlined the main use case for Bitcoin as being a decentralized, digital medium of exchange and hence rather an alternative to FIAT money than store of value assets such as gold. But don’t worry, the answer to that question is quite simple. We can spend money to obtain goods or services, pay our taxes or earn interest. The same is applicable to cryptocurrencies like bitcoin. Bitcoin can already be used as a mean of payment on many websites and as decentralized finance is on the rise, bitcoin and other coins like ether (ETH) can even be used as collateral to obtain loans or to earn interest and trading fees from liquidity pools and decentralized exchanges! With the adoption and general acceptance of crypto technology on the rise worldwide, usability of cryptocurrencies will further increase until finally, everything that today can be paid in FIAT money, will be payable in digital currencies like Bitcoin as well. Moreover, as the amount of newly issued amount of Bitcoin is hard-coded into the Bitcoin blockchain, the inflation rate is also fixed. This sharply contrasts FIAT currencies, which are controlled by central banks, which can essentially print money whenever they want in the quantity they want. Especially now amid the corona virus pandemic, continued quantitative easing programs (large scale asset purchases by central banks) to revive the economy have fostered fears over significantly increased inflation as the amount of newly created FIAT currency entering the financial system in the past few weeks has been enormous. For that reason, many (the DeFi Club included) believe that Bitcoin offers a much needed and very valuable option to hedge against inflationary tendencies and protect investor’s wealth.
So, in conclusion what really gives Bitcoin value? In our opinion it’s the combination of being a superior store of value to cash because it has many characteristics of a scarce asset like a precious metal (especially as a positive market outlook suggests future value gains), while being much more practical than gold as it is transferrable much more easily and spendable in shops and online. Also, because it’s fully digital it doesn’t need to be physically stored anywhere or transported between locations. Moreover, cryptocurrencies are technologically superior to fiat money and allow for instant money transfers globally at almost no cost, because the underlying blockchain technology allows to circumvent any intermediaries, which in the traditional system are charging you fees such as banks or other financial institutions.