Almost any conversation about Bitcoin sooner or later turns into a discussion about what gives Bitcoin value. Skeptical people argue that it doesn’t really have any value, while others see BTC as digital gold with almost infinite potential. So who’s right? There are several aspects to consider.
Why people need Bitcoin
Before we start discussing BItcoin, it’s worthwhile to try and understand why someone thought of an alternative to the usual fiat, as they are called, currencies.
- Governments and central banks issue modern currencies, this process is closed, no one has control over it outside of a narrow group of people;
- Financial crises and unfair distributions of wealth happen due a number of interwoven circumstances that include the collusion of large corporations, attempts to regulate complex economic processes by printing money, etc.
- Financial institutions don’t want to lose profit shares and, to avoid that, create difficulties for ordinary users and businesses – the conditions have changed, a global financial network covers the whole world, but cash flows barely cross state borders, causing a lot of inconvenience to transaction participants;
- A considerable part of the population of countries on the sidelines of the global economy is deprived of access to the banking system, these people do not have the opportunity to save money in their rapidly depreciating local currencies;
Bitcoin manages to solve these problems with the following features:
- The currency is absolutely free from control by any authority. The state does not act as an issuer or have the authority to manipulate it. The state does not have any relation to it at all.
- The currency has no borders, it can be used anywhere in the world and can be freely sent from one country to another.
- It is apolitical and does not give preference to a specific system or group of people.
Bitcoin is similar to gold
Governments and financial regulators are still trying to understand the nature of Bitcoin. So far, no one has come to the final conclusion whether the main digital asset is currency or an exchange commodity.
Bitcoin is usually compared with precious metals and is even considered to be “digital gold.” This is due to a number of reasons.
BTC creator Satoshi Nakamoto has limited the maximum number of coins. So, like there is with gold, there is a limited supply of Bitcoin.
Most Bitcoins have already been mined. There are certain reserves of precious metals on Earth and they are still being mined by humans.
Gold cannot be manipulated like fiat currencies because no one can recreate it. The same goes for Bitcoin – Bitcoin cannot be recreated “out of thin air” and each transaction with BTC is recorded in a publicly accessible blockchain.
Is Bitcoin made out of thin air?
A typical reason for skeptics’ doubts is the comparison of cryptocurrencies with Ponzi schemes. The main argument is that money appears as a result of the production of goods or services, but Bitcoin doesn’t. This is where questions arise about what cryptocurrency is provided for, why it costs as much as it does and what needs to be done to get coins.
Real money is backed with real goods, services and products, but Bitcoin has mining. The miners provide their computation power and electricity to support the network – the economic essence of digital money is similar to manufacturing. Additionally miners face real-world expenditures and losses:
- One-time – purchase of powerful equipment (video card or ASIC-computer);
- Permanent -–payment of electricity consumed;
- Random – repair or replacement of equipment that has failed.
What Bitcoin is backed by?
First of all, bitcoin has value for the same reason that paper and digital money is a convenient form of money that people usually accept. It is used to buy and sell things. However, unlike US dollars, whose value and legal status are guaranteed by the government, the value of bitcoin lies in its code, infrastructure and limited supply.
Bitcoin limited supply. Unlike traditional paper currencies, which can be printed endlessly, Bitcoin is inherently scarce. Only 21 million BTC will ever exist. While paper currencies are subject to annual inflation and lose part of their value, Bitcoin inflation is limited and controlled. In addition, you need to consider that some Bitcoins have been lost forever (sent to incorrect, non-existent addresses or to wallets whose keys were lost, etc.), which means that there are even less Bitcoins.
Divisibility. One bitcoin can be divided into 100,000,000 satoshi. One satoshi is equal to 0.00000001 BTC, the smallest unit of Bitcoin at the moment. This level of separation is embedded in the original Bitcoin code. If necessary, the division level can be changed to 16 or more decimal symbols, which means that Bitcoin has a near infinite degree of divisibility.
Portability. Bitcoin can be transferred via the internet easily, it is not bulky or heavy so it’s easy to transport physically versus other precious metals. This makes BTC the most transferable currency that has ever existed.
Decentralization. No one controls Bitcoin. Unlike traditional money, the Bitcoin network and its transactions are not subject to censorship, control or change.
Availability. You do not need to have a verified bank account in order to have or receive Bitcoins. All you need is basic computer knowledge and an internet connection. The availability of Bitcoin makes it extremely convenient for regions with a poor financial and banking infrastructure.
Cannot be counterfeited. Each Bitcoin transaction is recorded in a distributed registry. The system was designed to prevent the problem of double costs. As a result, all transactions in the Bitcoin network are uncontrolled.
The only true value of Bitcoins is their market price. This is a disadvantage due to the unpredictability of the rate and an advantage as well. The latter is expressed in the absence of connection to the costs of mining and the estimated value of assets. In fact, BTC is supported by increased volatility, a high rate, which provides more opportunities for speculation and big earnings in the short term.