Summary

Bitcoin’s value stems from a variety of different attributes. At the end of the day, the value of cryptocurrencies and fiat currencies comes from “trust”. As long as society believes in the fiat currency system, money will always have value. The same is true for Bitcoin: as long as users trust it, it has value, but there are more factors to consider.

Unlike fiat currency, Bitcoin is not regulated by a central bank, and its decentralized architecture has spawned a unique financial system. Blockchain technology brings security, practicality, and many other advantages, while subverting the traditional way of transferring global value. In many ways, Bitcoin can also be used as a means of saving value similar to gold.

Introduction

For beginners in cryptocurrencies, the biggest difficulty is figuring out how and why cryptocurrencies like Bitcoin (BTC) have value. Bitcoin is a digital token with no real assets to back it up, and the concept of mining is puzzling. In a sense, mining can create new bitcoins out of thin air. However, successful mining is inseparable from a huge investment. How does all this make Bitcoin valuable?

Imagine the money we use every day, these banknotes no longer need gold or assets to back them up. Thanks to banks’ fractional reserve system, the money we borrow is often just a string of numbers displayed on a screen. Governments and central banks such as the Federal Reserve can issue new money and increase the money supply through economic mechanisms.

Although the differences are obvious, Bitcoin, as a digital currency, still has some similarities with our usual fiat currencies. So, before diving into the cryptocurrency ecosystem, let’s first discuss the value of fiat currencies.

Why is money valuable?

In short, trust assigns value to money. The essence of money is a tool for exchanging value. Anything can be used as a currency to pay for goods and services, as long as the local community agrees. In the early days of human civilization, a variety of items played the role of money, including stones and shells.

What is legal tender?

Fiat currency is the official currency issued by the government. Currently, human society exchanges value by using paper money, coins, and digital amounts in bank accounts (also proof of personal loans or debts).

Previously, people would go to banks to exchange paper money for gold or other precious metals. At the time, this mechanism ensured that the value of currencies such as the dollar was pegged to an equal amount of gold. However, the gold standard has been phased out by most countries and is no longer the basis of the monetary system.

When currencies are no longer pegged to gold, fiat currencies in use today have no backing. This decoupling gives governments and central banks more leeway to set monetary policy and influence the money supply. Key features of fiat currencies include:

• Issued by a central agency or government.
• It has no intrinsic value, no value backed by gold and other commodities.
• There is no limit to the potential supply.

Why is currency valuable?

With the removal of the gold standard, money seems to have lost its value. However, we can still use money to pay for food, bills, rent, and other items. As mentioned earlier, the value of money stems from public trust.

Governments can only maintain a high level of trust if they unswervingly support and effectively manage fiat currencies. Once hyperinflation occurs and monetary policy fails, and the public loses confidence in the government or central bank, this trust will collapse – Venezuela and Zimbabwe are two typical negative examples.

Why are cryptocurrencies valuable?

Cryptocurrencies share the same concepts as standard currencies, but there are some notable differences. While cryptocurrencies like PAXG are pegged to commodities like gold, most cryptocurrencies have no underlying asset. Trust still plays an important role in maintaining the value of cryptocurrencies. For example, people realize the investment value of Bitcoin, understand that others also trust Bitcoin and accept it as a payment system and medium of exchange.

Utility is also an important factor for some cryptocurrencies. Some services or platforms require utility tokens to function properly. Therefore, services in high demand give value to utility tokens. There are many types of cryptocurrencies and the situation varies. The value of each token or project actually still depends on its own characteristics.

We summarize the characteristics of Bitcoin into the following five categories: utility, decentralization, trust system, scarcity, and security. Details will be discussed later.

What is intrinsic value?

Much of the discussion about Bitcoin’s value revolves around whether it has intrinsic value. What does this mean? Let’s take a commodity like oil as an example. It is an important resource for the production of energy, plastics and other materials, and contains enormous intrinsic value.

Stocks represent the equity of a producer or service provider and also have intrinsic value. In fact, the goal of many investors’ fundamental analysis is to calculate the intrinsic value of an asset. And fiat currency has no intrinsic value, after all, it’s just a piece of paper. As we know, its value comes from trust.

There are many investment options with intrinsic value in the traditional financial system, such as commodities and stocks. The exception is the foreign exchange market, where transactions revolve around fiat currencies, and traders can often profit from short-term and medium-term exchange rate fluctuations. So, what about Bitcoin?

Why is Bitcoin valuable?

The value of Bitcoin is a topic where the benevolent sees the benevolent and the wise sees the wisdom. Some people believe that the market price of Bitcoin is equal to its own value, but this view does not accurately answer our question. What matters is why people judge Bitcoin to be valuable in the first place. Let’s delve into the characteristics that give Bitcoin value.

The Practical Value of Bitcoin

One of the great things about Bitcoin is that it can quickly transfer large amounts of value around the world without relying on any intermediaries. While Bitcoin has higher fees for small transfers, multi-million dollar transfers are much more cost-effective. Below is a transfer worth about $45 million that costs less than $50 (as of June 2021).

While there are many networks with this utility, Bitcoin is the largest, safest, and hottest. As a Layer 2 application, the Lightning Network makes small transactions a reality. In fact, no matter the amount, borderless transactions are the real value.

The Decentralized Value of Bitcoin

Decentralization is a key feature of cryptocurrencies. By circumventing central authority regulation, blockchain creates greater autonomy for community users. The open source nature of Bitcoin determines that everyone can contribute to improving the Bitcoin network. Even the monetary policy of cryptocurrencies operates in a decentralized manner. For example, the job of miners involves verifying and validating transactions while ensuring that new bitcoins can be added to the system at a predictable and stable rate.

Decentralization makes Bitcoin a robust, secure and reliable system. No single node in the network can make decisions based on individual wishes alone. Both transaction verification and protocol updates require group consensus to avoid mismanagement or abuse of Bitcoin.

Bitcoin’s Trust System Value

Bitcoin’s decentralization is a huge network advantage, but still requires some security. Convincing users to collaborate in a large decentralized network is no easy task. To solve the so-called Byzantine Generals problem , Satoshi Nakamoto implemented a proof-of-work consensus mechanism to reward users who responded positively.

Trust is an important part of any valuable item or commodity. If the public loses trust in the central bank, the country’s currency will suffer a catastrophic blow. By the same token, if international remittances are made, we must trust the relevant Financial Institution Group. People naturally place a higher level of trust in the functioning of Bitcoin than other systems and assets in daily use.

However, users of Bitcoin do not need to trust each other, only Bitcoin technology. The technology is proven, trustworthy for reliability and security, and the source code is open to everyone. Proof of Work is a transparent and open mechanism that allows everyone to self-check. It’s not hard to see that its value lies in the ability to generate consensus that is almost infallible.

The Scarcity Value of Bitcoin

The limited supply within the Bitcoin framework is 21 million. When Bitcoin miners mine the last Bitcoin around 2140, no new coins will be produced. While traditional commodities such as gold, silver and oil have limited supplies, new reserves are discovered each year. These new discoveries make it impossible to accurately calculate their scarcity.

In theory, Bitcoin should deflate once it is completely mined. Losing or destroying bitcoins by users reduces the supply and drives up the price. Therefore, holders firmly believe that Bitcoin is extremely scarce and valuable.

Bitcoin’s scarcity has also spawned the popular Inventory Flow Ratio Model . This model studies the amount of mining and total inventory each year in an attempt to predict Bitcoin’s future value. Backtesting has proven that it can simulate past price curves very accurately. According to the model, Bitcoin’s scarcity is the main driver of price. After clarifying the potential relationship between price and scarcity, holders realize the value of Bitcoin as a value saving tool. 

The Security Value of Bitcoin

When it comes to the security of investment funds, Bitcoin is indeed better. As long as it is done properly, funds are absolutely safe and secure. In developed countries, keeping funds safe is the natural responsibility of banks. But many believe that Financial Institution Group fails to provide proper protection and that holding large amounts of cash is risky.

To carry out malicious attacks on the Bitcoin network, the computing power of criminals should exceed 51% of the current mining computing power . Such a large-scale cooperation is almost impossible. Even if an attack is launched, the whole process will not last long, and the probability of success is very small.

The real threats to Bitcoin savings are the following:

• Fraud and phishing attacks
• Lost private key

Save bitcoins in a compromised custodial wallet with no private key.

Please follow the best response strategy to ensure that the above does not happen, and this level of security is even far beyond that of banks. And the best part is that there are no fees for the security of cryptocurrencies. Also, compared to banks, there are no daily or monthly limits for cryptocurrency transfers. Users have full control over their Bitcoin funds.

Bitcoin as a Value Saving Tool

Most of the features described above prove that Bitcoin is an ideal vehicle for saving value . Precious metals, US dollars and government bonds are traditional stores of value, and their modern alternative, Bitcoin, better known as “digital gold”, is increasing its influence. High-quality value savings tools have the following advantages:

• Durability: Bitcoin is 100% durable as long as computers maintain the network. In fact, Bitcoin is not destroyed like paper cash and is more durable than fiat currencies and precious metals.
• Portability: Bitcoin is a digital currency, and portability is self-evident. Simply connect to the Internet and hold a private key to access Bitcoin assets anytime, anywhere.
• Dividability: Each bitcoin can be divided into 100 million satoshis (satoshis) , and users can conduct transactions of any size.
• Fungibility: Each or every satoshis bitcoin is interchangeable with the same asset. This property propels cryptocurrencies to become a medium of exchange of value on a global scale.
• Scarcity: The supply of Bitcoin is limited to 21 million coins, and millions have been lost permanently. The supply of Bitcoin is much lower than that of inflationary fiat currencies, whose supply will increase over time.
• Acceptability: Bitcoin has been widely accepted as a payment method by individuals and companies, and blockchain technology continues to evolve.