Why Does Bitcoin Have Value? A Future-Values Perspective
Three Reasons Bitcoin Has Value:
- Decentralized and Trustless
- Globally Frictionless
- Scarcity
#3. Let’s Start With Scarcity.
Scarcity refers to the fundamental economic problem of unlimited human wants and needs in a world of limited resources. In other words, a finite amount of resources are available to meet society's infinite demands.
Bitcoin is an excellent example of a finite resource. You might have read in my previous bit that Bitcoin is like digital gold. That’s because there will only ever be 21 million Bitcoins. Like gold, there’s a limited supply of it.
Bitcoin’s value is largely influenced by the principles of supply and demand. As demand for Bitcoin increases while its supply remains limited, its value rises. Essentially, the more people who want Bitcoin, the higher the price of 1 BTC climbs, making ownership of even small amounts of this digital currency increasingly valuable. This dynamic is a key factor in Bitcoin’s market behaviour and price fluctuations.
Your fiat currency, and even gold, increases its supply at a variable rate. This is the core aspect behind inflation and why your purchasing power decreases over time. It explains why a bag of milk used to cost our parents 5 or 10 cents now costs 5 to 10 dollars.
Bitcoin, on the other hand, is inflationary to a point. There is a hard cap in place, but it also has disinflationary measures — those that slow the inflation rate over time. The main one is the “Bitcoin halving” that cuts the amount of Bitcoin mined into existence every four years.
The available supply of Bitcoins decreases over time for several other reasons. One major factor is the loss of Bitcoins. This can happen when people forget the passwords to their digital wallets, mistakenly send Bitcoins to incorrect or non-Bitcoin addresses, or leave small amounts of Bitcoin in an address where the amount is too little to cover the transaction fee for moving them. These scenarios effectively remove Bitcoins from circulation. As a result, each year, the circulating supply of Bitcoin diminishes slightly, making the digital currency increasingly scarce. This scarcity can contribute to Bitcoin’s value, as the reduced supply may intensify demand among those seeking to own or use it.
If you securely store your private key (and thus your Bitcoin) for 20 years, and assuming Bitcoin remains a valuable and widely accepted digital currency, your Bitcoin will likely have a higher purchasing power in the future than today. This means the amount of goods or services you can buy with your Bitcoin could increase with time.
As Bitcoin evangelist Michael Saylor said, “Bitcoin is the only scarcity in the world.”
#2. Bitcoin Is Globally Frictionless.
Another reason Bitcoin has value is that it’s globally frictionless. If you wanted to send money to someone in another part of the world or say you live in Canada and want to cash a cheque in US dollars (this happened to our business the other day), you have to physically go to your bank to verify the transaction and cash the cheque.
We live in a globalized world; why do we need intermediaries? For a couple of reasons, the biggest is security. We rely on banks to protect our assets. If a suspicious transaction occurs in one of your accounts, you might get a notification from your bank that someone is trying to steal your money. Banks offer security on our hard-earned capital, and that’s part of the reason that, for generations, we’ve come to depend on them.
But what if you didn’t need a bank? What if international transactions could be faster and cheaper? What if there was a way to send money securely and transparently without needing a third party?
Bitcoin has value because you don’t need a bank; you are your own bank. It’s faster and cheaper to send Internet currency to anyone worldwide, and the transaction is secure and transparent through the blockchain. For every transaction, a digital record is recorded on the Bitcoin Network, and that record cannot be changed. It’s immutable.
This is one of the greatest strengths but can also be viewed as a legitimate concern when it comes to mass Bitcoin adoption. We’ll talk more about securing your bits in a future article.
#1. Bitcoin Is Decentralized And Trustless.
This brings me to my final point: Bitcoin has value because the blockchain network is decentralized and trustless.
No country owns Bitcoin. It isn’t printed by a centralized institution. Because of this, it doesn’t rely on the stability of any one country’s government, and its core properties aren’t influenced by the political winds and changing tides. A government can’t print trillions of Bitcoins (and willfully decrease your purchasing power) because of a change in policy, party, a global pandemic, or political corruption.
It’s trustless because Bitcoins can’t be faked, and there’s no such thing as a chargeback. When Bitcoin is sent from one person to another when you receive Bitcoin in your digital wallet, you know it’s real, and the person who sent it to you can’t get it back unless you decide to send it back.
The Future Of Bitcoin Depends On Adoption
The future of Bitcoin comes down to adoption. Like anything to succeed, people must agree that Bitcoins are valuable: “I will accept bits if you send them to me.”
There are many reasons to be hopeful that this future will come to pass. If we look at the growth of Bitcoin and its adoption over the last ten years, it’s been one of the fastest-growing technologies in the world.
The distribution of Bitcoin worldwide and the trend towards more universal Bitcoin adoption is stronger than ever in its history.
A likely scenario is that Bitcoin becomes the first global currency. It has already proven itself to be an effective store of value.
I hope you enjoyed this future values perspective. Check back for my next bit on “Becoming a Bitcoiner, Bit by Bit” coming soon.
