Why Does Bitcoin Have Value?
If you’ve been keeping up with the news the last few months, this is definitely not the first time you’re hearing about Bitcoin — as a digital currency, a method of payment, or even as a get-rich-quick scheme.
Last year, as the price of Bitcoin reached record highs, the topic of Bitcoin and “cryptocurrencies” began to infiltrate heated conversations among friends, family, and coworkers. Many debates end with confusion around the same issue: what — if anything — gave Bitcoin its skyrocketing value?
The answer might surprise you: Bitcoin and the peso are valuable for the exact same reason.
Since we were children, we have taken the value of the Piso for granted. Day after day, we give and receive pesos in exchange for goods and services, never questioning what these particular bills and coins mean beyond slips of paper and scraps of metal. Yet, we would be shocked to find anyone who denied that its value was real.
The bottom line is: the Philippine peso is worth only its equivalent in goods and services produced and sold within the borders of our nation. Like anything else, the peso rises in value as there is more demand for its use!
Bitcoin is no different. As a digital form of money, Bitcoin derives its value from its ability to be electronically exchanged for goods and services — anywhere in the world that accepts it. As the number of Bitcoin adopters grows, demand for Bitcoin grows even further — driving the rapid climb in price we all witnessed over the last year.
“But what’s wrong with cash?”
We can’t be blamed for wondering; after all, cash goes anywhere and is accepted by almost any business within the country. For most purposes, especially small day-to-day transactions, cash is easy and convenient. But, in the more complex transactions — requiring higher security or foreign currency exchange — Bitcoin might have an edge.
The greatest weakness of cash is that it can be physically lost or stolen. Even worse, the bills themselves can be counterfeited, which undercuts confidence in their value. To solve these problems, people rely on banks to hold verified deposits and on electronic methods to send larger sums of money.
However, transferring money between banks — especially internationally — involves fees and delays that make the process expensive and inefficient. Without the instant confirmation of a face-to-face cash transfer, we also have to be wary of errors such as missing deposits or accounting mistakes.
Bitcoin inherently holds the potential to correct many of these frustrations. The blockchain technology underlying the Bitcoin system automatically maintains a free, transparent, and “unhackable” (immutable) record of every bitcoin and bitcoin transaction. It thus backs our confidence in the authenticity of our coins and the accuracy of transactions. Not only does it eliminate accounting errors but it also allows near-instant transactions of money around the world.
And so we come back to the initial question: What drives value? The most concise answer is demand. If the US government started buying Piso to use in its economy, that demand would drive up how much value our Piso holds to the world.
Similarly, the value behind bitcoin will continue to rise in response to the increasing demands created by wider adoption and increased usage. Because Bitcoin allows us to transact with full confidence and efficiency, it is quickly becoming a more convenient way to access goods or services. As businesses and entrepreneurs steadily migrate to Bitcoin to interact in a global marketplace, this growing adoption base indicates an encouraging future for Bitcoin and its value.
Disclaimer: We are not an investment advisor, and this post is for educational purposes only. Any information contained in this blog is not meant to be taken as financial advice.
