Where does bitcoin derive its value?
When we look closely at Bitcoin, we are puzzled how a set of numbers built in a unique way can have a value equivalent to $10,000 a unit of it.
Bitcoin is an effective means of transferring money online, and it is controlled by a decentralized network with a transparent set of rules, thus offering an alternative to fiat money managed by a central bank.
There has been a lot of talk about how Bitcoin is priced and given value, and how it is possible for Bitcoin to go even higher.
In this article, we will try to answer the question: Why does Bitcoin have value?
1- Why do currencies have value?
A currency is usable if it is a store of value, in other words if it can be relied upon to maintain its relative value over time and without depreciation.
In many societies throughout history, commodities or precious metals were used as modes of payment since they had a relatively stable value.
Rather than requiring individuals to carry burdensome quantities of cocoa beans, gold, or other early forms of currency, societies eventually turned to coinage as an alternative.
However, the reason so many examples of minted coins could be used was that they were reliable stores of value, as they were made from metals that had a long life and stood up well against the risk of depreciation.
In modern times, minted coins often take the form of paper money that does not have the same real value as coins made of precious metals.
Although individuals use electronic currency and modern payment methods.
Some types of coins are based on the fact that they are 'representative', which means that each coin or coins can be directly exchanged for a specific amount of a commodity.
However, with countries leaving the gold standard in an effort to reduce concerns about the Fed's gold supply, many global currencies are now classified as securities.
Paper currency is issued by the government and is not backed by any commodity, but by an abstract belief in individuals and governments
Today, most major world currencies are fiat currencies.
Many governments and societies have found fiat currency to be the most durable and least likely to deteriorate or lose value over time.
It also features:
rarity, apportionment, utility, portability
These elements can be detailed as follows:
The key to maintaining a currency's value is supply.
A money supply that is too large may cause the prices of goods to rise, resulting in an economic collapse.
Too small a money supply can cause economic problems.
Money is a macroeconomic concept that aims to address the role of money supply.
In the case of fiat currencies, most governments around the world continue to print money as a means of controlling scarcity.
Many governments operate with a predetermined amount of inflation that lowers the value of paper currency.
In the US for example, this percentage has historically hovered around 2%.
While it is different with Bitcoin, which has a flexible issuance rate which changes over time.
Successful coins are divisible into smaller units.
For the single currency system to function as a medium of exchange across all kinds of goods and values within the economy, it must have the flexibility associated with this division.
The currency must be divisible enough to accurately reflect the value of each available good or service throughout the economy.
A currency must have an interest in order to be effective.
Individuals must be able to reliably trade units of currency for goods and services.
This is the main reason that currencies evolved in the first place, so that market participants can avoid having to swap goods directly.
The utility also requires that the coins can be moved easily from one place to another.
Cumbersome precious metals and commodities do not easily meet this requirement.
Currency must be easily transferred between participants in the economy in order to be useful.
In terms of fiat currency, this means that currency units must be convertible within the economy of a particular country as well as between countries by exchange.
There are other additional elements that must be present in the coin, such as durability and its ability to resist counterfeiting.
2- Compare Bitcoin with fiat currencies:
When Bitcoin was launched in 2009, the developer (or developer group) stipulated in the protocol that the supply of 21 million tokens would be discontinued.
The current supply of Bitcoin is about 18 million units, the rate of Bitcoin issuance halves roughly every four years, and the supply should exceed 19 million years in 2022.
It is assumed that this protocol will not change.
Note that changing the protocol requires the approval of the majority of the computing power involved in Bitcoin mining, which means it is unlikely to do so.
Bitcoin's method of supply is different from most fiat currencies.
It is often thought that the global fiat money supply is divided into different groups such as:
M0, M1, M2, and M3.
M indicates the currency in circulation.
Since M0 and M1 are easily accessible for use in commerce, we will regard these two directories as a medium of exchange, while M2 and M3 will be considered as money to be used as a store of value.
As part of their monetary policy, most governments maintain some flexible control over the supply of currency in circulation, making adjustments to economic factors.
This is not the case with Bitcoin.
So far, the continued availability of more tokens has encouraged the mining community, although this should change significantly as the 21 million block cap approaches.
What exactly will happen at that time of theDifficult to separate.
Therefore, the Bitcoin currency is characterized by scarcity and lack of supply.
21 million bitcoins are much smaller than most fiat currencies in the world.
Fortunately Bitcoin is divisible by 8 decimal points.
The smallest unit is equal to 0.00000001 Bitcoin, called “Satoshi” which is the nickname of the Bitcoin developer.
Bitcoin has a much greater degree of divisibility than the US dollar as well as most other fiat currencies.
While a US dollar can be divided into cents, or 1/100 of a dollar, only one "Satoshi" is 100,000,000 satoshis.
It is this extreme divisiveness that makes bitcoin scarcity possible if bitcoin continues to rise over time, users with small fractions of a single bitcoin can still participate in daily transactions.
Without the divisibility, the price of say $1,000,000 for 1 Bitcoin would prevent the currency from being used.
One of Bitcoin's biggest strengths is its use of blockchain technology.
The blockchain is a trusted decentralized distributed ledger system, which means that there are no parties involved in the bitcoin market that need to establish trust in each other as the system functions properly and optimally.
This is possible thanks to a detailed system of checks and verifications which is essential for maintaining the ledger and for mining Bitcoin. Best of all, the flexibility of blockchain technology means that it has utility outside of the cryptocurrency space as well.
Thanks to currency exchanges, wallets and other tools, bitcoins are transferable between parties within minutes, regardless of transaction size and at very low costs.
Transferring funds in the current system may take several days at a time and incur fees. Convertibility is a very important aspect of any currency.
Whereas, Bitcoin transfer requires some electricity and very small fees that hardly appear compared to fiat currencies.
Thanks to a complex and decentralized blockchain ledger system, it is extremely difficult to fake bitcoin.
Doing so essentially requires the alliance of all the participants in the Bitcoin network, which is no small feat.
The only way a person can create fake bitcoin is by performing what is known as double spending.
This refers to a situation in which a user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.
While this is not a problem with fiat securities it is impossible to spend the same dollar bill in two or more separate transactions – it is theoretically possible in cryptocurrencies.
This makes double spending unlikely, given the size of the Bitcoin network.
A so-called 51% attack is necessary, in which a group of miners theoretically control more than half of the entire network's power.
By controlling the majority of the network's power, this group can control the remainder of the network to falsify records.
However, such an attack on Bitcoin would require an enormous amount of effort, money and computing power, making the possibility highly unlikely.
3- Bitcoin Challenges:
In general, Bitcoin holds up well in the above-mentioned elements when compared to fiat currencies.
So what are the challenges facing bitcoin as a currency?
One of the biggest issues is the status of Bitcoin as a store of value.
Bitcoin as a store of value depends on its usefulness as a medium of exchange.
We base this in turn on the assumption that in order for something to be used as a store of value, it must have some intrinsic value, and if bitcoin is not successful as a medium of exchange, it will have no practical utility and therefore will have no intrinsic value effect and will not be attractive as a store of value. Values.
Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metals.
Throughout most of its history, the current value of Bitcoin has been driven primarily by speculative interest.
Bitcoin has demonstrated the characteristics of a bubble with a sharp rise in prices and an obsession with media attention.
This is likely to subside given that Bitcoin continues to see heavy dependence in the mainstream, but the future is uncertain.
Bitcoin is being challenged by the difficulties surrounding the cryptocurrency space.
In recent years, cryptocurrency exchanges have been plagued by hacks, thefts, and fraud.
Of course, thefts also happen in the world of fiat currencies.
However, in those cases the regulation is much more settled, providing more straightforward means of treatment.
Bitcoin and cryptocurrencies are still widely seen as more than just a wild jungle when it comes to regulation.
Different governments view Bitcoin in completely different ways, and one thing is certain that expansion and growth is what defines Bitcoin today.