Why does Bitcoin have value? Bitcoin is an innovative payment system, but few people understand how it operates, understandably so: It is a relatively new technology that has not yet seen complete widespread education or adoption. To begin to conceptualize why Bitcoin has value we must first ask ourselves not about Bitcoin, but rather money in general. Why does money have value? Is it just in our heads, or do we actually have a common perception of a set of essential characteristics of money that we take for granted?
Money such as the dollar, euro, or yen has always been useful in our lifetime, therefore we take its worth for granted. But when we sit down to think about it, to what do you attribute their worth?
It is useful to review the three functions of money:
- Store of value: Money must be an efficient store of value that doesn’t depreciate over an extended period of time
- Unit of Acccount: Money must service as a device we use to measure value
- Medium of exchange: Money must be widely accepted as a payment method
Bitcoin hasn't been around nearly as long as the dollar, so it's hardly surprising that it isn't as widely acknowledged as the currency just yet. However, it is also important to recognize that Bitcoin fulfills the three functions of money already. When the general public learns more about Bitcoin, we expect them to rapidly see that it is a far superior currency.
Bitcoin may be considered the best currency ever developed when seen through the perspective of the six qualities of sound money: durability, portability, divisibility, fungibility, scarcity and acceptability.
If you look back on the history of money - from commodity money (like gold coins) to representative money (like the gold-backed dollar) and then the transition to the fiat money we have today, you can see that society realized the benefits or durability and portability. The U.S. Dollar follows the criteria for the other qualities as well.
As we try to wrap our heads around Bitcoin becoming more wide accepted and adopted, we must ask ourselves: How do the six qualities of sound money apply to Bitcoin? As we discuss this, you may realize that Bitcoin qualifies for all of these, in many ways even better than the U.S. Dollar.
Durability - Bitcoin can't be lost as long as the blockchain is maintained by at least one node on the network. The network is extremely unlikely to fail or completely lose power, as Bitcoin is completely decentralized in nature.
Portability - Bitcoin is easily transported. Cryptocurrency can easily be held via a private key stored anywhere from the cloud to a USB stick to a piece of paper, and can quickly be transferred anywhere with an internet connection.
Divisibility - Bitcoin is highly divisible. It can be divided into 100 million units known as satoshis (or sats), and anyone can own any amount.
Uniformity - A bitcoin is impossible to replicate. One person’s Bitcoin is unique to them, and any attempt at replication would not validate on the blockchain.
Scarcity - Although Bitcoin has had a history of being volatile, Bitcoin scarcity can be mathematically proven. There will only ever be 21 million bitcoins, ever. This restriction is in the protocol's code. A majority of nodes, Bitcoin's rule enforcers, must act against their economic self-interest to change the limit.
Acceptability - Global crypto ownership has increased by +178% in 2021. It is expected that the number of global crypto owners will reach 1 billion by the end of 2022. The number of users climbs as bitcoin becomes simpler to purchase, spend, and store. People in the United States have embraced cryptocurrencies in record numbers over the past few years, but the vast majority of crypto holders still consider their holdings to be an investment more than anything Still, many are hopeful for a future where Bitcoin is widely accepted as a method of payment, too. With many corporations beginning to accept cryptocurrency payments and both financial institutions and fintechs adding new crypto features to their product offerings, it seems the popularity of crypto payments will continue to grow in the coming years.
Bitcoin is a digital currency that combines the durability of gold with the mobility and fungibility of fiat currency. In many ways it exceeds the U.S. Dollar in the six qualities of sound money. The distribution of Bitcoin is rigorously controlled by its code and enforced by its users. It may be transmitted anywhere in the globe in a matter of seconds without paying the expensive fees that are often associated with traditional systems. The use cases and ability of cryptocurrency have over traditional fiat money thus make it obvious why it has value.
