While Bitcoin has given the world a completely revolutionary and alternative way of transferring money, there are still plenty of questions surrounding its price and where it comes from.
In order to have a better idea about the price of Bitcoin and its value, we have to take a couple of steps back. So what makes currencies have value in the first place? The general answer to this question is because such type of assets appears to be a store of value, which, in other words, means that it can maintain its value over long periods of time without depreciation in a reliable manner. Years ago, there used to be no currencies as we know them nowadays, instead, people used commodities or precious metals as their primary means of payment due to their relatively stable value. Eventually, someone came up with the concept of minted currencies, which quickly took over the world and are used as a primary mean of payment nowadays all over the world. The main reason why such an implementation stuck around for an incredibly long while was that the back-then newly-introduced minted currency was made out of various metals. Thanks to the physical qualities of such metals, the first minted currencies had long shelf lives and, therefore, almost no depreciation.
Nowadays, minted currencies are not looking the same as years ago. The modern type of money is completely different, starting from the fact that the majority of global currencies have a paper form, up to the fact that they are no longer «minted» but rather «fiat». The latter difference came about after the world started shifting away from the gold standard. Therefore, the money that you currently have in your pocket is not backed by any assets or commodity. Instead, such money is issued by the government itself and is agreed to be valid for a direct exchange of goods & services. In a more simple language, both government and citizens simply trust the fact that either side will accept it. Over time, such a form of money has proven itself to be quite durable and to have very little risk of losing value.
In reality, the currency is not evaluated by whether or not it is a store of value, instead, by its scarcity, divisibility, utility, transportability, durability, and counterfeitability aspects, which as a result create the value of the currency themselves.
The availability of the currency on the market or its supply is the main maintenance mechanism of a fiat currency. There simply cannot be too much or too little of it, otherwise, it will cause economic collapse. It is not a secret that governments all over the world are constantly printing more money, which creates something like inflation and drives the value down. Luckily, this is not the case of Bitcoin, which has a flexible issuance rate that changes over time. A cryptocurrency like Bitcoin practically has no owner. Its network is simultaneously controlled by all of its users with only the improvement possibility of software used to utilize it. However, the very nature of blockchain technology, which facilitates Bitcoin and other cryptocurrencies as well, does not allow for the enforcement of such implementations unless the majority of the network agrees upon it. In return, such a consensus protocol creates the incentive for everyone involved in the network to comply & protect it. What is more, the amount of Bitcoin to ever be available to the world is fixed! However, we would like to discuss it in another article.
The divisibility of the currency also affects its value. Fiat currencies must be divisible in a way to efficiently represent the medium of exchange for various goods and services within the economy. Using the example of the United States Dollar, which is a great example of the fiat currency, its smallest deviation is only 1/100, which is 1 cent. On the other hand, Bitcoin’s smallest deviation is beyond the reach of any of the world’s fiat money. While the amount of Bitcoin (21 million tokens) in circulation is extremely smaller than of any fiat currency, it has divisibility of up to 8 decimal points. Bitcoin’s smallest unit is called Satoshi, after the name of its mysterious creator, and is equal to 0.00000001 BTC. Such an extreme deviation allows for quadrillions of Satoshis floating around the world. Unfortunately, due to the scarcity of Bitcoin and the uncertainty of its future, its users might, at some point, face the issue of not being able to pay for the majority of goods and services due to the currency’s extreme price.
Another important feature of the currency is its utility. The concept of the currency’s utility was designed to eliminate the burdensome approach of direct trading and allow individuals within the economic system (or cryptocurrency network) to be able to trade for goods and services in a reliable way. The very nature of the blockchain technology, which Bitcoin is built on, provides a decentralized and trustless environment. Therefore, it serves as the automated ledger system, which does not require establishing any additional trust mechanisms in order to function properly.
The transferability of the currency is also crucial to its existence. If one cannot freely and easily transfer it among the network users (citizens within the economy), then there is no use of such an asset. In the case of fiat currencies, they can be freely moved within the economic environment, as well as between countries, through the means of currency exchange. As for Bitcoin and other digital assets, they have an obvious edge over their fiat predecessors. Transferability became one of Bitcoin’s biggest selling points, thanks to various cryptocurrency exchanges, wallets, and other handy tools. One can simply transfer any amount of Bitcoin to any other party within minutes at extremely attractive costs.
Moving on, durability and counterfeitability are the last, however, not the least features the currency must possess. Obviously, a currency has to be durable and withstand constant amortization. The banknote or a bill can be damaged in a whole variety of ways in our everyday life. In the case of Bitcoin and other digital money, such an aspect is not really playing that big of a role, since there is actually no physical use of such assets. This adds another point to the Bitcoin scoreboard. Unfortunately, the lack of physical presence does not eliminate the possibility of Bitcoin’s loss. The token can easily be lost FOREVER, however, not destroyed, if its user loses their cryptographic key. It is estimated to be approximately several million Bitcoin tokens being lost and simply existing in the records of blockchain permanently.
What about counterfeitability? You have probably heard a couple of stories during your lifetime regarding some counterfeit currency schemes or scandals. Can the same practice be applied to Bitcoin, though? The answer is «NO»! Why it is so, and how does Bitcoin network work is explained in the article here.
Having mentioned all of the above points, the phenomenon of Bitcoin is still looked at quite sceptically by some experts. While its features appear to make it quite competitive against fiat currencies, there are still some challenges tagging along. For the most part, the value of bitcoin is not backed by any commodity or whatsoever, instead, its price is totally made up out of speculative interest and media craze. What is more, its utility & transferability are still limited due to its complexity and non-mainstream consumption.