Why do Bitcoin have Value?

    Pathik Bhattacharya
    Pathik Bhattacharya
    Published on December 9, 2022 6:41 AM

    Updated on January 16, 2023 11:27 AM

    Bitcoin is a cryptocurrency which is not backed by any commodity or physical asset. The value of Bitcoin comes from various factors like Durability, Portability, acceptance etc.
    Why do Bitcoin have Value?
    Source: Unsplash

    World’s No. 1 Cryptocurrency Bitcoin is what comes first in mind when someone says “Digital Asset”. Bitcoin is a set of codes that needs to be decoded to get the rewards in BTC. The decoding of complex maths to acquire bitcoin is known as mining, and the hardware used to do so is called miners. Additionally, Bitcoin is traded through various crypto exchanges globally. 

    But, Is a Bitcoin anything like physical money? The answer is obviously “NO”. The meaning of cryptocurrency means cyber money or virtual money. 

    Then how does it have value in the market? To understand this, let’s go into brief about how Bitcoin has become a valuable asset.

    Intrinsic Value of Commodities and Assets

    To know about how assets like stock shares and commodities like gold and silver get their values, we first have to understand what is intrinsic value. 

    Intrinsic value: A commodity's intrinsic value is the worth that a thing holds in and of itself. It does not need to be supplied with a value from another source. Simply, the thing backs its values. 

    Example: Strength is one of the intrinsic values of metal. 

    Likewise, various commodities like Gold and silver hold their intrinsic value to be exchanged with fiat currency.

    However, the majority of the world's currencies are now fiat currencies. To be valuable, a commodity must be exchangeable for something of like worth. To be traded in the future, the commodity must also be able to keep or store its value. Furthermore, if the product in situ has a limited supply, its value rises with demand over time.

    Bitcoin: The Trustworthy Trustless Currency

    Bitcoin (or other cryptocurrencies), like fiat currency, is not backed by gold or silver and hence has no intrinsic value. The value of any currency is determined by the government's support and the public's belief in the government. As a result, for any money to be established as an exchange of value inside a network, the network must trust it regardless of who (or what) is supporting it.

    This is precisely where Bitcoin's value is increasing. The value of a cryptocurrency is determined by the faith that millions of individuals have placed in it in an otherwise trustless world. Millions of miners and traders are all termed Bitcoin network participants since they believe in the world's largest cryptocurrency and base its price solely on demand and supply.

    Bitcoin’s Limited Supply and High Demand

    The maximum supply of bitcoin is limited to 21 million by the Bitcoin network. This total supply cannot be increased or changed in any manner, and it will be impossible to generate extra bitcoin when the last block is mined in about the year 2140. This is made feasible by Bitcoin's dependence on blockchain technology, which enables crypto assets to have a limited, fixed quantity and to be completely traceable and unalterable from the start.

    While it may appear like Bitcoin miners produce bitcoin out of thin air at times, they are striving mathematically to earn additional BTC through the process of mining according to the Bitcoin network's fixed rewards schedule. Mining incentives are decreased in half every four years (or every 210,000 blocks) and eventually taper off to zero, implying that no new BTC will be released from then on. Even though only 21 million BTC will ever be generated, the circulating supply will steadily fall and become deflationary as more BTC departs the public market and is placed in cold storage.


                                                                    Source: Ycharts


    In the view of many supporters, this is what gives bitcoin its value — or at least one feature of what gives bitcoin its value. While the supply of fiat currencies may be extended and decreased, the supply of all fiat currencies globally has been expanding for decades, resulting in an inevitable degradation of buying power. This means that bitcoin's fixed supply is more analogous to commodities like gold and oil, which are physically constrained.

    Bitcoin’s Transfer Ease and Security

    Other advocates of Bitcoin believe that its value stems from its capacity to transmit vast sums of value at a cheap cost when compared to traditional methods. While sending a small amount of BTC can be relatively expensive, it is also feasible to transfer millions of dollars worth of BTC to any other Bitcoin-compatible crypto address for a comparatively low price.

    This flexibility to function as borderless digital money is shared by many cryptocurrency initiatives and is not unique to Bitcoin. However, because Bitcoin is the world's largest and most battle-tested cryptocurrency, it has earned a strong reputation as the most generally trusted and relied-upon cryptocurrency in existence. 

    While Bitcoin's transaction costs are greater than those of many other cryptocurrencies, the Lightning Network improvement makes sending smaller transactions less expensive and more efficient. The Lightning Network also allows new digital products and services to be created on the Bitcoin network.

    Bitcoin is also almost hard to seize if users utilize a non-custodial digital wallet to keep their BTC and safeguard the private keys to their crypto addresses. The majority of BTC thefts occur when a user compromises their account by inadvertently disclosing their password via a phishing attack or other type of cybercrime, or by using a shady or insecure cryptocurrency exchange with an exploitable single point of failure.

    Bitcoin’s User Trust

    While there are several factors why so many investors regard Bitcoin to be valuable, it all boils down to trust. When a large number of individuals agree that something is useful, it becomes valued, and the reason why people value it becomes less significant than the number of people who believe in its intrinsic worth.

    It's crucial to remember that the current financial system is based on trust. Bitcoin is intended to provide its users with an efficient, irreversible alternative financial system without requiring them to place their faith in any single person or organisation. The majority of Bitcoin users have faith in the project's core technology, which is open-source and auditable by anybody on the planet.

    To sum up, the six most important factors of sound money which Bitcoin is providing are:

    Durability - Bitcoin cannot be destroyed. Bitcoin lives as long as the blockchain is maintained on even a single machine. The network's uptime has remained an astounding 99.99% since its inception, and it has gone more than 3,200 days without an outage. 

    Flexibility - Bitcoin can be transmitted in seconds everywhere there is an internet connection, with probabilistic ultimate payment in an hour. A bitcoin user who has their private key essentially takes their bitcoin around with them. 

    Divisibility - A single bitcoin comprises 100 million smaller units called satoshis. ‍

    Fungibility - Bitcoins are all identical. No coin is more precious than the one before it. Contrary to gold or paper cash, counterfeiting is not feasible.

    Scarcity - Bitcoin is the first commodity that can be proven to be scarce. There will never be more than 21 million bitcoins. Anyone may verify this restriction by inspecting the protocol's source. To change the limit, the great majority of nodes, the enforcers of Bitcoin's rules, would have to act against their economic self-interest. 

    Acceptance - While estimates for the number of bitcoin holders vary, some put the figure as high as 114 million. 3 This number rises by the day as more people learn about the protocol and it becomes simpler to acquire, spend, and keep bitcoin.

    Bitcoin's Frequently Asked Questions (FAQs)

    Q1) Why Bitcoin has value?

    Ans: Bitcoin's value is derived in the same manner that every currency does: by meeting the six qualities of money. Durability, mobility, divisibility, fungibility, scarcity, and acceptability are some of these traits.

    Q2) How does Bitcoin gain value?

    Ans: Cryptocurrency can acquire value on trading platforms. Its value rises as a result of supply and demand. The market's opinion of its value at any particular time determines its value.

    Q3) Is it possible to hack Bitcoin?

    Smaller blockchains have been attacked in this fashion, but bigger networks, like as Bitcoin and Ethereum, make it almost hard to succeed owing to the expenses involved in gaining 51% of the hash rate (BTC) or staked currency (ETH).

    Q4) Can Bitcoin be converted to cash?

    Ans: Of course. Crypto exchanges are there to convert BTC into USD or any currency which is available in the exchange. 

    Q5) Can Bitcoin be destroyed?

    Ans: The Bitcoin blockchain's decentralized, historical, and processing, power-intensive qualities make erasing or overwriting a block of previously spent Bitcoin, known as "double spending," impossible.