What gives Bitcoin value? 💵
A lot of people I’ve talked with about Bitcoin are confused how Bitcoin has any value. Since a bitcoin is essentially just a long string of characters that can prove that a person is the owner of said bitcoin, I can see why it’s confusing. Honestly, until very recently, I struggled with the same question. My original response was that it was in high demand and thus, it has value. While this is true, it really doesn’t answer the question.
The reason Bitcoin has value is that of the system behind it, the cryptographic economy that supports it. To explain this, let’s look at the dollar. The dollar hasn’t been backed by anything since 1971 when Richard Nixon ended the way the dollar had historically been backed by gold. Since then the only reason the dollar has value is that it is backed by the United States government which provides stability and economic incentive to participate and play fairly in the system. The amount of currency and thus the value of that currency is determined by the government. Since the government has a track record of holding up the system even amidst difficult periods like the economic depression in 2008, it gives the dollar value.
Bitcoin has value for the same reason because it has a strong economic structure that uses cryptography backing it. The strong economic structure Bitcoin provides comes from the protocol of consensus that it has. Bitcoin uses cryptography to prove certain facts such as when a transaction occurred and who signed a transaction which allows Bitcoin to create a system where based on those facts, individuals are held to a certain standard based on economic incentives. Bitcoin has value because it is backed by the secure and economic system built based on cryptography rather than a single government to provide an incentive to play fairly in the system. To understand this better, let’s look at an example.
In this example, we will go over a scenario where a miner will attempt to double spend. Blocks are what hold transaction and they are the ledger that prevents someone from double spending their coin (trying to send the same coin to two different people) but let’s say they tried to double spend by producing two conflicting blocks. Each block requires proof of work, a cryptographic puzzle that proves the miner of the block used a lot of electricity in order to generate that block. If the miner wants to over ride that by creating a new block, he now has to come up with more than 51% to beat the network to the next block. In that case, it’s not economic for a miner to do so because the miner will end up spending more electricity on overriding the block than he will get from double spending the coin, even if it’s a whole lot of coins. In this case, the fact the system has protected itself by providing no economic incentive to play unfairly.
So Bitcoin has an incentivizing system behind it and that’s why it has value but why are people using it over a traditional bank? Well, there are two answers to this question. The first answer is early adopters. Early adopters have seen this technology as a way to revolutionize society and revolutionize the web and so have jumped on the opportunity to support and use Bitcoin. The second reason is that it is a way for quicker transaction settlements, especially if you are trying to transact globally. A global transaction through banks can take days where on Bitcoin it takes less than an hour to confirm that your transaction has gone through. These are just two of the reasons why people are starting to switch to Bitcoin and this list will continue to grow as it develops and matures.
Bitcoin has value because of the economic structure that cryptography provides. This will continue to strengthen as more people join the network. As long as Bitcoin continues to scale, more people will strengthen the consensus protocol and reduce the risk of a 51% attack which, by the way, hasn’t happened since Bitcoin came out in 2009. So, trust in the system, just like you trust the dollar and get involved!