Why are Bitcoins valuable?

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The price of a single Bitcoin has seen a massive increase since the cryptocurrency was first introduced in 2008 with highs and lows along the way. It hit an all-time high of around $ 60,000 in April and has continued to fluctuate since.

Despite the volatility, Bitcoin continues to generate investor interest in its long-term history of creating and sustaining value. But unlike a stock, which has value because it represents part of a company’s ownership, or even a bond, which represents the value of a debt that you will pay off when due, it can be more difficult. to determine the value created by a decentralized digital currency with such a short history.

These fluctuations can make investors wary, but also raise the question of why is Bitcoin valuable in the first place?

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Bitcoin as a currency and why currencies are valuable

Currencies have value because people think they have it, and companies or groups have decided that they will be used as a medium of exchange.

Fiat currencies became widespread after the elimination of the gold standard (which required every dollar to be backed by physical gold holdings). Fiats like the US dollar are not backed by any commodities and have value because a larger system or society accepts them to do so.

For example, you can take a $ 20 ticket to the store and buy $ 20 worth of goods, time, and effort. But the piece of paper you use to pay has no intrinsic value.

Bitcoin, a cryptocurrency created and published by a pseudonym by the name of Satoshi Nakomoto, has certain characteristics of a store of value that resemble existing currencies like the US dollar or Japanese yen:

Limited supply: The maximum supply of Bitcoins is 21 million. There will never be more than 21 million Bitcoin. For many experts, this limited supply, or scarcity, greatly contributes to the value of Bitcoins. Cannot be copied: Since Bitcoin runs on a blockchain ledger, no one can counterfeit a Bitcoin. The blockchain keeps track of transactions and ensures that the system continues to operate based on the original rules set out by Satoshi Nakomoto. Transportable: Bitcoin is extremely transportable. You can easily move it from one exchange account or digital wallet to another. Transferable: Bitcoin is relatively easy to transfer to another user or merchant. You just need to know someone’s public key (wallet address) to send them Bitcoin.

All of these factors help establish Bitcoin as a type of currency, but they do not explain Bitcoin’s exponential price growth and its unique appeal as a store of value. Saving cash is not considered a good investment strategy after all, generally your US dollars will see significantly more value growth in an investment vehicle than saving cash. Even among cryptocurrencies, Bitcoin is unique for its value. Someone could create a different kind of digital asset, with all of the same properties, and it might never have any value (in fact, many have tried and failed). So why Bitcoin?

Why is Bitcoin valuable?

In short, Bitcoin is valuable because people think it is, says Bryan Routledge, associate professor of finance at the Tepper School of Business at Carnegie Mellon University. And if that sounds a bit unstable and awkward, that’s because it is.

People believe that Bitcoin will someday be worth more than it is today, which increases their demand, and its value continues to grow, just like gold.

Gold is just dirt that people have decided that, okay, this dirt that’s kinda shiny, it’s valuable to people, says Kiana Danial, author of Cryptocurrency Investing for Dummies. Humans attribute this value to gold, to your $ 100 bill. The $ 100 bill itself has no value. We attribute this value to it.

Like gold, you can’t (usually) walk into a store and transact directly with Bitcoin, but you can buy and hold it. But gold has one property that Bitcoin hasn’t yet: it’s been around for much longer, so its enduring value has been proven time and time again.

[READ MORE]: You can buy more things than ever with Crypto. Here’s why you shouldn’t

What you want to know is that in a year, will your Bitcoin be recognized as Bitcoin? Routledge said. The answer to this, says Routledge, depends on the future of blockchain technology and the belief that this technology will continue to grow in popularity.

What do investors need to know?

The price of Bitcoin fluctuates a lot and it is impossible to know if it will continue to rise in value or fall into obscurity, which is why it is smart to allocate only a small percentage of your total assets. to Bitcoin. Experts recommend that you keep any cryptocurrency investment below 5% of your portfolio, like any other speculative investment. And don’t invest in cryptocurrency at the expense of other financial goals like having an emergency fund or saving for retirement.

Similar to gold, people buy Bitcoin not because they expect they can go to the store and spend it, but because they expect it to retain its value, NextAdvisor told NextAdvisor. Galen Moore, Director of Data and Indexes at Coindesk. .

But Bitcoin is only the most famous among thousands of different cryptocurrencies. Other cryptocurrencies come with different considerations for investors.

Bitcoin value compared to other cryptocurrencies

If Bitcoin is digital gold, then Ethereum, the second largest cryptocurrency by market cap, is more like oil. And like oil, its value is tied to its uses in the real world, although those uses have not yet made it into the mainstream.

[READ MORE]: Ethereum: what you need to know before investing

Oil itself has value, but you can also invest in oil futures in the commodities market, or invest in stocks representing oil companies and energy technologies. Likewise, cryptocurrency investors could invest in Ethereum, which has a native currency called ether.

The Ethereum blockchain serves as the foundation for innovation and development in the cryptocurrency space, from digital art sales using NFT to decentralized peer-to-peer lending. Its currency, the ether, therefore has an intrinsic value: access to this network, says Routledge.

Ethereum may have a clearer inherent use case where Bitcoin doesn’t, but that doesn’t mean it’s guaranteed to maintain or increase its value. With thousands of different cryptocurrencies all claiming to meet an unmet need or opportunity, experts recommend keeping your crypto investments in the two major cryptos Bitcoin and Ethereum. Yet not all cryptocurrency assets are regulated and speculative, and there isn’t enough data to make concrete predictions on how your investment may grow in the future.

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