Why is "Bitcoin" valuable?
Currencies have value because people think they do and societies or groups have decided to use them as a medium of exchange.
You can take a $20 bill into a store and buy $20 worth of goods, time, or services. But the physical piece of paper you use to pay has no inherent value.
Bitcoin, a cryptocurrency created and marketed by the pseudonymous Satoshi Nakomoto, has some characteristics of a store of value similar to existing currencies such as the US dollar or the Japanese yen:
Limited supply: Bitcoin has a maximum supply of 21 million. It will never exceed 21 million bitcoins. According to many experts, this limited supply, or lack thereof, contributes greatly to Bitcoin's value.
Cannot be copied: Because Bitcoin runs on a blockchain ledger, no one can counterfeit Bitcoin. Blockchain tracks transactions and ensures that the system continues to operate based on the original rules put forth by Satoshi Nakomoto.
Portability: Bitcoin is highly portable. You can easily transfer it from one exchange account or digital wallet to another.
Transferable: It is relatively easy to transfer Bitcoin to another user or seller. Just knowing someone's account address is enough to send them Bitcoin.
All of these factors help establish Bitcoin as a type of currency, but they do not explain Bitcoin's price growth and unique appeal as a store of value. Saving cash is not considered a good investment strategy - typically, your US dollar will appreciate more in value than if it were held as cash in an investment vehicle. Even among cryptocurrencies, Bitcoin is unique in its value. Someone could create another type of digital asset with all the same properties and still have no value (in fact, many have tried and failed). So why has Bitcoin remained valuable?
Why is Bitcoin valuable?
Carnegie University finance professor Bryan Routledge says Bitcoin has value "because people think it has value." "And if that sounds kind of corny and silly, that's because it really is."
People believe that Bitcoin will one day be worth more than it is now, which increases people's demand for Bitcoin and its value continues to rise like gold.
Unlike traditional currencies, Bitcoin is not issued by a central bank or backed by governments. For investors, buying bitcoin is different from buying stocks or bonds because Bitcoin is not a corporation. As a result, there are no corporate balance sheets to review, no fund performance to compare, or other traditional tools for choosing investments.
Therefore, monetary policy, inflation rates, and measures of economic growth that typically affect a currency's value do not apply to Bitcoin. Bitcoin acts more like a commodity used to store value, so its price is influenced by the following factors:
- Bitcoin supply and market demand
- The cost of producing bitcoin through the process of "Mining".
- Number of competing cryptocurrencies
- Laws governing its sale and use
- Media and news
The price of Bitcoin fluctuates a lot and it is impossible to know if it will continue to gain in value, so it is wise to allocate only a small portion of your total assets to Bitcoin. Experts recommend keeping cryptocurrency investments to less than 5% of your portfolio, just like any other speculative investment. Do not use your emergency or important financial resources like retirement to invest in any cryptocurrency.
The price of bitcoin is volatile, so $100 you spend on bitcoin shares today may not be worth $100 tomorrow or even in the next 30 minutes. However, your bitcoin can be worth much more. If you are buying it as an investment, you should consult a financial and investment professional regarding your particular financial circumstances.
