Why Do Bitcoins Have Value?
Bitcoin offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money.1 There has been a lot of talk about how to price Bitcoin, and we set out here to explore what the cryptocurrency's price might look like in the event it achieves further widespread adoption. First, however, it is useful to back up a step. Bitcoin and other digital currencies have been touted as alternatives to fiat money. But what gives any type of currency value?
- Currencies have value because they can be used as a store of value and a unit of exchange.
- Successful currencies have six key attributes—scarcity, divisibility, utility, transportability, durability, and counterfeitability.
- The cryptocurrency bitcoin has value because it holds up very well when it comes to these six characteristics, although its biggest issue is its status as a unit of exchange as most businesses have yet to accept it as payment.
- Bitcoin's utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces.
- However, if bitcoin gains scale and captures 15% of the global currency market (assuming all 21 million bitcoins in circulation) the total price per bitcoin would be roughly $514,000.
Why Currencies Have Value
Currency is usable if it is a store of value, or, put differently, if it can reliably be counted on to maintain its relative value over time and without depreciating. In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having a relatively stable value.
Rather than require individuals to carry around cumbersome quantities of cocoa beans, gold, or other early forms of currency, however, societies eventually turned to minted currency as an alternative. Still, the reason many examples of minted currency were usable was because they were reliable stores of value, having been made out of metals with long shelf lives and little risk of depreciation.
In the modern age, minted currencies often take the form of paper money which does not have the same intrinsic value as coins made from precious metals. Perhaps even more likely, though, individuals utilize electronic currency and payment methods. Some types of currencies rely on the fact that they are "representative," meaning that each coin or note can be directly exchanged for a specified amount of a commodity.
However, as countries left the gold standard in an effort to curb concerns about runs on federal gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that parties will accept that currency.
Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least likely to be susceptible to deterioration or loss of value over time.
This will be the topic in a four part series. I hope you enjoyed the blog and learned a few new facts, thank you for reading.