What gives bitcoin its value?

 

As bitcoin steadily maintains its surge in popularity and worldwide acceptance, a large majority are still reluctant to acquire bitcoin and use it as a medium of exchange despite the core flaws that plagued the current fiat monetary system. People who are never exposed to any alternative forms of monetary bases and are used to the existing system of government-issued money look at it with confusion and are dubious to believe that a currency that is invisible, intangible, and has no basis in anything physical can obtain a market value like bitcoin. The core of this confusion is rooted with an unclear understanding of its great value proposition, social utility, fear of the unknown, and low trust due to the events and controversies abundantly circulated by the news media.

 

The dominance of fiat money started in the 20th century where it is produced by a nation’s government and the value is not backed by gold or physical commodity. Instead, its value basically comes from its direct utility, the trust people place in it, and its general acceptance as money. In other words, U.S. dollar bills, coins, and other national fiat currencies are only valuable because the government has ordered it to be a legal tender and everyone accepts it as a form of payment. The same applies to bitcoin where usage and intrinsic value will always be a strong indicator of its price. Bitcoin’s value grows as the whole Bitcoin ecosystem grows. The more people use and buy bitcoin, the higher the price goes. Bitcoin’s value comes from its network and shares the network effect properties just like those of telephones, fax machines, and social media.

 

Moreover, bitcoin’s value is embedded in its innovative payment system and not in the currency unit itself that merely expresses the value of the network in terms of price. Bitcoin’s valuable properties that makes it a viable medium of exchange such as scarcity (known limited quantity: only 21 million BTC), fungibility (every bitcoin has the same value as its counterpart), divisibility (offers infinite degree of divisibility: 1 satoshi equals 0.00000001 BTC), efficiency (allows cheap and safe value transfer through different channels: internet, satellites, radio waves), durability (can be reused countless of times), accessibility (open source), and distributed (cannot be controlled by a reckless central authority) further increase the usage and acceptance of bitcoin amongst consumers thereby increasing bitcoin’s value.

 

In addition, since “normal” paper money can be printed on a whim, it causes inflation that leads to the constant increase in global prices where low income and fixed income people suffer. Furthermore, hyperinflation results in currency devaluation wherein a great number of currency eventually collapse. These society’s most intractable problems create a desperate need for cryptocurrencies as people’s confidence in fiat money continues to erode. People are beginning to realize the underlying reason behind inflation which is the manipulation of central authority. And to escape the bondage of state-controlled currency, people are turning to alternative forms of exchange like bitcoin that is not affected by inflation which further contributes to its mass adoption.

 

However, in spite of bitcoin’s potential to rebuild free market capitals, it is difficult to say whether cryptocurrency can really replace traditional fiat system given the political intervention and conflicting interests of all parties involved. Additionally, Bitcoin in its current state is not yet mature enough in terms of volatility and usability. But given the speed of adoption and Bitcoin’s technological advancement to address its technical limitations along with other payment solutions, it has the potential to become a new global currency. Meanwhile, how the different governments choose to regulate this technology, the pace of economic activity, and how various market players interact with this technology will dictate the role of cryptocurrencies in the future society.

 

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