Is Bitcoin valuable?

The value of Bitcoin comes from different contents. In the final analysis, the value of cryptocurrency and fiat currency comes from “trust”. As long as society believes in the legal currency system, money will always be valuable. Bitcoin is the same: as long as users trust it, it has value, but more factors should be considered.

Unlike legal currency, Bitcoin is not subject to the supervision of the central bank, and its decentralized structure has spawned a unique financial system. Blockchain technology has brought security, practicality and many other advantages, while subverting the traditional global value transfer pipeline. From various aspects, Bitcoin can also be used as a means of value saving similar to gold.

For beginners of cryptocurrencies, the biggest difficulty is to understand the principle and reason why cryptocurrencies such as Bitcoin (BTC) are valuable. Bitcoin is a kind of digital token, which is not supported by real assets, and the concept of mining is also puzzling. In a sense, mining can create new bitcoins out of thin air. However, successful mining is inseparable from huge investment. How does all this make Bitcoin valuable?

Imagine the money we use everyday. These notes no longer need gold or assets as support. Thanks to the partial reserve system of banks, the funds we borrow are often just a series of digits displayed on the screen. The government, the Federal Reserve and other central banks 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 customary fiat currency. In retrospect, before going deep into the cryptocurrency ecosystem, let’s first discuss the value of fiat currency.

What is the value of money?

In short, trust gives value to money. The essence of money is a tool for exchanging value. As long as the local community has reached a consensus, any goods can be used as the currency to pay for goods and services. In the early days of human civilization, various objects played the role of currency, including stones and shells.

What is legal tender?

Legal tender is the official currency issued by the government. At present, human society exchanges value by using notes, coins and digital amounts in bank accounts (which are also proof of personal loans or debts).

In the past, people would go to the bank to exchange paper money for gold or other precious metals. At that time, this mechanism ensured that the value of currencies such as the US dollar was linked to an equivalent amount of gold. However, the gold standard has been eliminated by most countries and is no longer the basis of the monetary system.

After the currency is no longer linked to gold, the fiat currency used today has no support. This decoupling gives the government and the central bank more space to freely formulate monetary policy and affect the money supply. The main features of legal coins include:

Issued by a central agency or government.

It has no intrinsic value and no value supported by gold and other commodities.

Why are legal coins valuable?

With the abolition 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 comes from the trust of the public. Only by unswervingly supporting and effectively managing the legal currency can the government maintain high trust. Once hyperinflation occurs and monetary policy fails, the public loses confidence in the government or the central bank, and this trust will collapse – Venezuela and Zimbabwe are two typical negative examples.

Why is cryptocurrency valuable?

Cryptocurrency and standard currency have the same concept, but there are also some obvious differences. Although cryptocurrencies such as PAXG are linked to commodities such as gold, most cryptocurrencies do not have underlying assets. Trust still plays an important role in maintaining the value of cryptocurrency. For example, people realize the investment value of Bitcoin, understand that others also trust Bitcoin and accept it as a payment system and transaction medium.

For some cryptocurrencies, utility is also an important factor. Some services or platforms require utility tokens for normal use. Recall that services in great demand give value to utility tokens. There are many kinds of cryptocurrencies and different situations. The value of each token or item still depends on its own characteristics.

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

What is intrinsic value?

Many discussions on the value of Bitcoin revolve around whether it has intrinsic value. What does this mean? Let’s take oil as an example. It is an important resource for the production of energy, plastic products and other materials, and contains huge internal value.

The stock represents the company equity of the manufacturer or service provider, which also has intrinsic value. In fact, the goal of many investors to carry out fundamental analysis is to calculate the intrinsic value of assets. And fiat money has no intrinsic value, after all, it is 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 usually profit from short-term and medium-term exchange rate fluctuations. What about Bitcoin?

What is Bitcoin worth?

The value of Bitcoin is a topic of different opinions. Some people believe that the market price of Bitcoin is equal to its own value, but this view cannot accurately answer our question. What matters is why people decide Bitcoin is valuable in the first place. Let’s take a closer look at the characteristics that give Bitcoin its value.

The Practical Value of Bitcoin

One of the advantages of Bitcoin is that it can quickly transfer a large amount of value around the world without relying on any intermediary. Although Bitcoin’s small transfer costs are high, millions of dollars of transfers will be cost-effective. The following is a transfer valued at approximately $45 million, but the cost is less than $50 (as of June 2021).

Although there are many networks with such practicality, Bitcoin is the largest, most secure and most popular network. As a Layer 2 application, Lightning Network makes small transactions a reality. In fact, no matter the amount, cross-border transactions are the real value.

The decentralized value of Bitcoin

Decentralization is a key feature of cryptocurrency. By circumventing the supervision of central institutions, 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 cryptocurrency operates in a decentralized way. For example, the miners’ work involves verifying and validating transactions while ensuring that new bitcoins can join the system at a predictable and stable rate.

Decentralization makes Bitcoin a stable, safe and reliable system. No node in the network can make a decision on its own will. Both transaction verification and protocol update require consensus of the community to avoid mismanagement or abuse of Bitcoin.

Distributed value of Bitcoin

Bitcoin network allows as many users as possible to participate in it, and continuously improves the overall security. The more nodes connected to the Bitcoin distributed network, the greater the value of Bitcoin. Transaction books are distributed among different users without relying on a single fact source.

Without such dispersion, it is difficult to verify multiple versions of facts. Imagine a team together sending a file via email. As long as the files are transmitted among team members, they can create different versions in different states.

In addition, compared with decentralized databases, centralized databases are more vulnerable to network attacks and power outages. It also happens that the credit card is not used smoothly due to server failure. In contrast, a system like Bitcoin, based on cloud technology and jointly maintained by thousands of users around the world, is undoubtedly more secure and efficient.

The Value of Bitcoin’s Trust System

The decentralization of Bitcoin is a huge network advantage, but it still needs some security guarantees. It is not easy to persuade users to cooperate in large-scale decentralized networks. In order to solve the problem of the so-called Byzantine General, Nakamoto Cong implemented the workload proof consensus mechanism to reward users who responded positively.

Trust is an important part of any valuables or commodities. If the public loses trust in the central bank, the country’s currency will suffer a disastrous blow. Similarly, if international remittances are made, we must trust the relevant financial institutions. Compared with other systems and assets in daily use, the operation of Bitcoin naturally gives higher trust.

However, Bitcoin users do not need to trust each other, just trust Bitcoin technology. This technology is proven, reliable and secure, and the source code is open to everyone. Workload proof is a transparent and open mechanism, allowing everyone to check and verify themselves. It is not difficult to see that its value is reflected 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 dug up the last Bitcoin around 2140, there will be no new coins. Although the supply of traditional commodities such as gold, silver and oil is limited, new reserves will be found every year. These new findings make it impossible to calculate their scarcity accurately.

Theoretically, once it is completely depleted, Bitcoin should undergo deflation. The loss or destruction of Bitcoin by users will reduce the supply and drive up the price. In retrospect, the holder firmly believes that Bitcoin is extremely valuable.

The scarcity of Bitcoin has also spawned a popular inventory flow ratio model. This model studies the annual mining volume and total inventory, trying to predict the future value of Bitcoin. The backtracking test proves that it can accurately simulate the past price curve. According to the conclusion of the model, the scarcity of Bitcoin is the main driving force of the price. After clarifying the potential relationship between price and scarcity, the holder realizes the value of Bitcoin as a value saving tool. We will further explore this concept at the end of the paper.

The Security Value of Bitcoin

In terms of the security of investment funds, Bitcoin is indeed better. As long as the operation is proper, the fund is absolutely safe. In developed countries, it is a natural duty of banks to ensure capital security. However, many people believe that financial institutions are unable to provide proper protection measures, and holding large amounts of cash is fraught with risks.

If we want to carry out malicious attacks against the special currency network, the computing power of criminals should exceed 51% of the current mining computing power. Cooperation on such a scale is almost impossible. Even if the attack is really launched, the whole process will not last too long, and the probability of success is very small.

The real threats to Bitcoin savings are as follows:

Fraud and phishing attacks

Missing private key

Save Bitcoin in a damaged escrow wallet without a private key

Please follow the best response strategy to ensure that the above situation will not occur, and the security level is far higher than that of the bank. And the best thing is that there is no charge for the security of cryptocurrency. In addition, there is no daily or monthly limit for cryptocurrency transfers compared to banks. Users can fully control their own Bitcoin funds.

Bitcoin as a value saving tool

Most of the features described above prove that Bitcoin is an ideal tool for value saving. Precious metals, dollars and government bonds belong to the traditional value storage pipeline. Bitcoin, its modern alternative, has a reputation of “digital gold” and is constantly increasing its influence. High quality value saving instruments have the following advantages:

Durability: Bitcoin is 100% durable as long as there is a computer to maintain the network. In fact, Bitcoin will not be damaged like paper cash, and its durability is better than fiat money and precious metals.

Portability: Bitcoin is a digital currency, which is self-evident. You can access Bitcoin assets anytime and anywhere just by networking and holding the private key.

Severability: Each Bitcoin can be divided into 100 million satoshis, and users can conduct transactions of any size.

Interchangeability: Each or every satoshis bitcoin can be exchanged with similar assets. This kind of content promotes cryptocurrency to become a global value exchange medium.

Scarcity: The supply of Bitcoin is limited to 21 million, and millions have been lost forever. The supply of Bitcoin is much lower than that of inflationary fiat currency, which will increase over time.

Acceptability: Bitcoin has been widely accepted by individuals and companies, and blockchain technology continues to develop.

Summary

Unfortunately, there is no clear and simple answer to why Bitcoin is valuable. Compared with precious metals and fiat coins, cryptocurrencies also have the key content of high-value assets, but they cannot be easily classified into the same category. Cryptocurrency has no government support. Although it is a digital currency, it is also as scarce as commodities.

A few people lack common sense and are prejudiced. They suspect that Bitcoin is worthless, and even regard it as “fraud” and “Ponzi scheme”. It is obviously an unfounded panic. In a word, Bitcoin operates in a very secure network, and communities, investors and traders endow it with high value.