Every discussion about Bitcoin sooner or later leads to a dispute over what gives Bitcoin value. Skeptics claim it has no value, while believers see it as digital gold with near-infinite potential. So who is right and what really makes a single Bitcoin valuable? There are several attributes to consider.
In this article, we will discuss:
A Brief History of Money
A brief look at the history of money reveals that as long as people agreed that something specific had value, then it did. Essentially, it's faith that makes money work.
In the beginning, people used to trade until it became too inconvenient. At that point, they started trading goods for things like shells and stones, then gems and rare metals. In recent times they have been replaced by a government that instilled money, which is now the most accepted form of currency. As money evolved, it always had the following attributes – fungibility, scarcity and non-counterfeiting. Also, people have noticed that it is more convenient to use coins that are easily portable, stable, and divisible.
Why do bitcoins have a cash value?
First, Bitcoin has value for the same reason as paper and digital money – it's a practical form of money commonly accepted by people. It is used to transfer value and buy or sell things. However, unlike US dollars, whose value and legal status are imposed by the government, Bitcoin's value comes from its code, infrastructure, scarcity and adoption.
While not tangible, Bitcoin code offers features of traditional fiat money, including scarcity, divisibility, portability, fungibility, and recognizability. Furthermore, Bitcoin is decentralized and can be used without intermediaries, provides some level of transparency, can be accessed and used by anyone with an Internet connection, is impossible to spoof and confiscate, and has other features like programming. Most importantly, it can be used as a store of value like gold or other commodities, but unlike its physical counterparts, it can be transported from one end of the world to another through communication channels in a matter of minutes.
Valuable Bitcoin Properties
Bitcoin shortage. Unlike traditional fiat currencies that can be inflated endlessly, Bitcoin introduces digital scarcity. There will only be 21 million BTC. Unlike fiat currencies, which experience annual inflation and lose some of their value, Bitcoin's inflation is limited and controlled. Furthermore, if we count the Bitcoins lost forever (sending to incorrect addresses, non-existent ones or those in wallets whose keys were lost, etc.), the stock is deflating, which means that there will be less and less Bitcoins available.
Divisibility. A single Bitcoin can be divided into 100000000 Satoshis. One Satoshi is equal to 0,00000001 BTC, the smallest unit of Bitcoin at the moment. This level of division is built into the original Bitcoin code. If the need arises, the split level can be changed to 16 or more decimal places, meaning that Bitcoin offers an infinite degree of splitability.
Portability. Bitcoins can be transferred through a communication channel such as the internet, satellites or even radio waves, making it the most transferable currency ever.
Fungibility. Each Bitcoin has the same value as its counterpart, regardless of who owns it and what history it has. Just as an ounce of pure gold is always equal to another ounce of pure gold. No matter what happens, a Bitcoin remains an interchangeable symbol of value with another Bitcoin.
Durability. Any Bitcoin or Satoshi can be reused countless times without degrading.
Recognition. A growing number of merchants and users recognize and accept Bitcoins. While it is still far from the acceptance level of fiat coins, many people distinguish Bitcoin from non-cash coins or other counterfeit money and are willing to accept it as a means of payment.
Decentralization. No entity oversees Bitcoin. Unlike traditional money, no one can censor, control or alter the network or its transactions, so no one can confiscate your money.
Accessibility. You don't need to have a verified bank account to own or accept Bitcoins. All you need is some basic computer knowledge and an Internet connection. Bitcoin's accessibility makes it extremely convenient for low-banking areas of the world.
Impossibility of forgery. Every Bitcoin transaction is recorded in a distributed ledger and is protected by the computation work of the nodes. The system was designed to avoid the double-spend issue that prevented previous digital coins from taking off. As a result, all transactions on the Bitcoin network are false and irrevocable.
Schedule. Unlike regular money, Bitcoin also introduces a programmability dimension. This means that, in the future, Bitcoin can receive updates and have even more useful features, such as smart contracts, multisig transactions and others.
Stability and reserve of value. The only feature that is still missing is Bitcoin's price stability. Because of the volatility, Bitcoin is used more like a commodity, like gold. However, this is likely to change as Bitcoin gains more adoption and there is less incentive to speculate on it. Until the widespread adoption of cryptocurrencies, Bitcoin is expected to remain somewhat volatile.