What Gives Bitcoin Its Value?

Why Is Bitcoin Valuable?

With so many crypto projects achieving remarkable market valuations, many people have become curious as to how these cryptocurrencies are valued. This is especially true when it comes to Bitcoin, which is the first ever blockchain platform, digital asset, and the largest cryptocurrency in terms of total market cap. Unlike cryptocurrencies that are backed by a physical asset such as gold or the U.S. dollar, bitcoin (BTC) is entirely digital and uncollateralized, and miners create new bitcoin every day. This begs the question of how bitcoin’s price has skyrocketed from fractions of a cent to tens of thousands of dollars over the past decade.

In order to properly explain what gives bitcoin its value, it’s essential to consider how other popular investments and financial assets get their value. Publicly-traded stocks generally have value because they represent an equity share of a company that produces goods or services that can be exchanged for money. Similarly, commodities like oil and lumber tend to have intrinsic value since they are directly used to manufacture new goods, keep a business running, or enable other means of value creation. However, not everything that is considered valuable today necessarily has intrinsic value.

But what about digital currencies? Why is bitcoin valuable? Bitcoin derives its value from many of the reasons we have discussed above. Now let’s take a deeper look into the qualities that give bitcoin its value.

Bitcoin Scarcity: Part of What Gives Bitcoin Value

The Bitcoin network limits the total supply to 21 million bitcoin. This total supply cannot be expanded or altered in any way, and it will no longer be possible to mine additional bitcoin once the last block is mined in approximately the year 2140. This is made possible through Bitcoin’s reliance on blockchain technology, which allows crypto assets to incorporate a limited, fixed supply, and to be fully traceable and inalterable from inception.

While at times it seems that Bitcoin miners create bitcoin out of thin air, they are actually competing to earn new BTC mathematically through the process of mining according to the Bitcoin network’s fixed rewards schedule. The mining rewards accrued by network participants are cut in half every four years (or every 210,000 blocks), and will eventually taper off to zero, meaning no new BTC will be issued from then on. Though there are only 21 million BTC that will ever be created, the circulating supply will gradually shrink and become deflationary as more and more BTC exits the public market into cold storage.

This provable bitcoin scarcity and deflationary supply stand in sharp contrast to fiat currencies, which are often dependent on monetary policies that alter their total supplies. This is what gives bitcoin its value in the eyes of many proponents — or at least one characteristic of what gives bitcoin its worth. While the supply of fiat currencies can be expanded and contracted, the supply of all fiat currencies globally has continued to expand for decades, leading to an inevitable dilution in purchasing power. This means bitcoin’s fixed supply is more akin to commodities like gold and oil, which are physically limited. However, unlike bitcoin, which is provably scarce due to its blockchain architecture, the total supply of physical resources like gold and oil can be hard to determine given that new reserves are continually discovered, and physical assets can be hard to trace and value.

What Gives Bitcoin Value? Easy To Move & Difficult To Take

Bitcoin scarcity alone is a major draw for many investors and Bitcoin proponents, but it has other benefits that can add to its intrinsic value. For other proponents of Bitcoin, what gives it value is the ability to transfer large amounts of value at a relatively low cost as compared to traditional alternatives. While it can be relatively expensive to send a small amount of BTC, it’s also possible to send millions of dollars’ worth of BTC to any other Bitcoin-compatible crypto address for a relatively minimal fee.

This ability to serve as a borderless digital currency is common among crypto projects, and is not unique to Bitcoin. However, since Bitcoin is the largest and most battle-tested cryptocurrency in the world, it has achieved a formidable status as the most widely trusted and relied-upon cryptocurrency in existence. And while Bitcoin’s transaction fees are higher than many other cryptocurrencies, its Lightning Network upgrade makes it less costly and more efficient to send smaller transactions. The Lightning Network also enables the creation of new digital products and services on the Bitcoin network.

Bitcoin is also nearly impossible to confiscate, so long as users implement a non-custodial crypto wallet to store their BTC and protect the private keys to their crypto addresses. Most BTC thefts occur when a user compromises their account by accidentally sharing their password through a phishing attack or other form of cybercrime, or by using a disreputable or poorly-secured crypto exchange with an exploitable single point of failure. The self-sovereignty Bitcoin provides may not be a key value proposition in developed countries that have sophisticated banks and financial checks and balances in place. However, hundreds of millions of people around the world do not have access to modern financial services, and even those who do may not want to rely on financial institutions.

Is Decentralization What Gives Value to Bitcoin?

The above features are possible because Bitcoin is a decentralized, algorithmically driven project. Decentralization is a core feature of many cryptocurrencies and refers to projects that are powered by a distributed web of individual users who collectively verify transactions and store a record of everything that happens on the network. In other words, decentralized crypto projects like Bitcoin are less subject to human decision-making than their centralized counterparts in the traditional finance world, because they do not need to rely on a centralized party to sign off on transactions, secure the network, or remove dishonest actors.

By cutting out centralized intermediaries, Bitcoin can give more power and freedom to its community of users. Practically anyone can participate in the Bitcoin mining process, which not only results in new BTC at a predictable, steady rate, but also involves the verification and validation of all Bitcoin transactions. No single individual user on the network is meant to make decisions on everyone’s behalf, and all of Bitcoin’s protocols are designed to require group consensus, which helps safeguard the project from mismanagement and abuse. This means that the more users Bitcoin has, the more secure it becomes, since the project’s governance is shared across more individuals and therefore becomes more difficult to tamper with. While most Bitcoin advocates cite a combination of the reasons mentioned above, for many the decentralized structure is the key feature of bitcoin, what gives it value, and how it can be a bulwark against financial censorship.

Trust Determines the Value of Bitcoin – and Everything Else

While there are numerous reasons why so many investors consider Bitcoin to be valuable, at the end of the day it mainly comes down to trust. If enough people agree that something is valuable, then it becomes valuable, and the reason why people value it becomes less important than the number of people who believe in its intrinsic value.

It’s important to remember that the modern financial system is built on this very form of trust, even though existing fiat currencies and traditional financial instruments do not have the characteristics of Bitcoin outlined above. Bitcoin is designed so that its users can benefit from an efficient, immutable alternative financial system without having to place their trust in any one person or institution. Most Bitcoin users trust the project’s underlying technology, which is open source and auditable by anyone in the world. Time and again since its inception, this technology has proven to be highly secure and resilient. This is what gives value to bitcoin.