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Why Do Bitcoins Have Value?

Since the cryptocurrency's inception in 2008, the price of a single Bitcoin has risen dramatically, with significant ups and downs along the way. It reached an all-time high of over $60,000 in April and has subsequently fluctuated.

Despite the volatility, Bitcoin continues to pique the curiosity of investors due to its long track record of creating and sustaining value. However, unlike a stock, which has value because it represents a portion of a company's ownership, or even a bond, which reflects the value of a debt that will be repaid at maturity, it can be difficult to quantify the value created by a decentralized, digital currency with such a short history.

These swings might make investors nervous, but they also raise the issue of why Bitcoin has value in the first place.

Bitcoin as Currency, and Why Currencies Have Value

Currency has value because individuals believe it does, and societies or organizations have chosen it will be used as a means of exchange.

Following the demise of the gold standard, fiat currencies became widely used (which mandated that every dollar be backed by a holding of physical gold). Fiats, such as the US dollar, are not backed by any commodity and have value because a larger system or society accepts it.

For example, you can go to the shop with $20 money and buy $20 worth of things, time, and effort. However, the actual piece of paper you use to pay has no inherent worth.

Bitcoin, a cryptocurrency invented and published by a pseudonymous entity known as Satoshi Nakomoto, shares several characteristics of a store of value with current currencies such as the US dollar and Japanese yen:

Limited supply: Bitcoin has a maximum supply of 21 million coins. There will never be more than 21 million Bitcoin in existence. Many analysts believe that the restricted supply, or scarcity, is a significant factor in Bitcoin's value.

Cannot be copied: No one can forge a Bitcoin since it is based on a blockchain ledger. The blockchain records transactions and guarantees that the system continues to operate following Satoshi Nakomoto's original regulations.

Transportable: Bitcoin is a very transportable currency. Money is simple to transfer from one exchange account or digital wallet to another.

Transferable: It is quite simple to transfer Bitcoin to another user or merchant. To transmit Bitcoin to someone, you only need to know their public key (wallet address).

All of these elements contribute to Bitcoin's status as a form of money, but they do not explain Bitcoin's exponential price increase or its unique attractiveness as a store of wealth. After all, cash savings aren't regarded as a solid investment plan – your US dollars will normally rise in value far faster in an investment vehicle than in cash savings. Bitcoin's value is unrivaled among cryptocurrencies. Someone could create another form of digital asset with all of the same features, but it might never be valuable (in fact many have tried and failed).

Why Does Bitcoin Have Value?

In short, Bitcoin has value "because people believe it does," according to Bryan Routledge, associate professor of finance at Carnegie Mellon University's Tepper School of Business. "And if that seems a little unstable and wacky, that's because it is."

People believe Bitcoin will one day be worth more than it is now, which boosts demand for it, and its value, like gold, continues to rise.

“Gold is just dirt that people decided that, OK, this dirt that is kind of shiny, it has value to people,” says Kiana Danial, author of "Cryptocurrency Investing for Dummies." "That is the value that humans attribute to gold, to your $100. The $100 banknote has no intrinsic worth. We give it that worth."

You can't (typically) walk into a store and purchase and sell Bitcoin as you can gold, but you can buy and hold it. But gold has one advantage that Bitcoin does not have – at least not yet: it has been there considerably longer, so its long-term worth has been demonstrated over and again.

"What you want to know is, will your Bitcoin be recognized as a Bitcoin in a year?" Routledge asks. The answer, according to Routledge, is dependent on the future of blockchain technology and the conviction that it will continue to achieve general appeal.

What Do Investors Need to Know?

Bitcoin's price varies dramatically, and it's difficult to predict whether it will continue to gain in value or fade into obscurity, which is why it's prudent to commit just a tiny part of your total assets to Bitcoin. Cryptocurrency investments, like any other speculative investment, should be limited to less than 5% of your portfolio, according to experts. Also, don't put your money into bitcoin at the expense of other financial goals, such as having an emergency fund or preparing for retirement.

However, Bitcoin is merely the most well-known among thousands of alternative cryptocurrencies. Other cryptocurrencies have distinct factors to consider for investors.

Bitcoin Value vs. Other Cryptocurrencies

If Bitcoin is digital gold, Ethereum, the second-largest cryptocurrency by market capitalization, is more akin to oil. And, like oil, its value is linked to its real-world applications – even if such applications have yet to enter the mainstream.

Oil is valuable in and of itself, but you may also invest in oil futures on the commodities market or inequities that represent oil firms and energy technology. Similarly, cryptocurrency investors may choose to invest in Ethereum, which has its currency known as ether.

The Ethereum blockchain provides a foundation for cryptocurrency innovation and growth, ranging from digital art sales utilizing NFTs to decentralized peer-to-peer financing. According to Routledge, its currency, ether, has an inherent value: access to that network.

Ethereum may have a clearer underlying use case than Bitcoin, but it does not ensure that it will retain or increase in value. With thousands of alternative cryptocurrencies all claiming to answer some unmet need or opportunity, experts advise sticking to the big two cryptos—Bitcoin and Ethereum. Nonetheless, all cryptocurrency assets are unregulated and speculative, and there is insufficient evidence to make any kind of precise forecasts about how your investment will increase in the future.

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