Disclaimer: None of what I say should be taken as financial advice. I’m not an accredited financial advisor. Please use what I say as only a portion of your due diligence in researching these new financial instruments.
Lately, there has been an influx of new people coming into the cryptocurrency space. Many people are seeing the speculative value of Bitcoin and other assets rise and are eager to enter this new investing space. But some people are asking the right questions before jumping in, and I applaud them for that. How does Bitcoin have value since it’s just a digital creation? How is the value determined? How do you know Bitcoin is legitimate?
As I’ve been on the crypto scene since 2013, I’ve had the privilege to watch this industry mature. I’ve seen my fair share of scams and legitimate projects. I’ve had the ability to watch and learn in this space over time. This is my attempt to help new people coming into this area learn and understand what digital currencies, assets, and platforms are, and what they’re trying to accomplish.
The goal in my journey to write about digital assets is to help people learn and make good decisions regarding the security of their financial future.
For something to have value, it needs to accomplish several objectives. The following is a list of things that help an asset or class have value;
If an asset is scarce and holds utility, for example crude oil, then it has value. If a currency is fungible and secure, then it has value. All of these things work together to create something that is valuable to people.
Let’s take a look at how Bitcoin, and other cryptocurrencies, embody these traits.
Bitcoin has a supply cap of 21 million. That’s the total about of Bitcoin that will ever be in circulation. When you take into account lost funds, lost keys, this supply will be less. So that takes care of the scarcity aspect.
When you compare this to current stores of value, like precious metals or some commodities, you can see that this is a good thing. Unlike the printing of the dollar, which leads to uncontrolled inflation, Bitcoin caps this and it makes the asset scarce.
This is a key concept to analyze when investigating in other digital assets. Some other projects don’t provide a cap on their supply. This allows them, like fiat currencies, to endlessly print or mint their coins. And while this can have some value, it’s usually abused and leads to inflation and devaluing. It’s important to look out for these things when evaluating whether a cryptocurrency is worth investing in, and how much to invest.
Demand is also another factor that drives value. If no one wants what you have, then what you have is essentially worthless. Also, the old adage “it’s only worth what you can sell it for” is pretty accurate. If you have a box of old baseball cards that you think is worth $1000, but you can’t get anyone to actually buy them, then what you really have is a box of worthless paper.
Bitcoin and other digital asset values are largely driven by demand and speculation. People understand that the utility of Bitcoin and other assets is becoming increasingly apparent, and so their demand is rising. Coupled with supply and scarcity, this is driving the price.
Another key factor for value is utility. This doesn’t always have to be the case, but it certainly helps. Pokemon cards don’t really have a use other than entertainment. But as we can see, their value has risen enormously over the past couple of years because of other previously mentioned factors.
If something has utility, it usually adds to and provides value which drives price. Bitcoin definitely has utility as a means of commerce exchange, but moreover, other digital assets are creating utility functions that we’re only now becoming aware of.
Let’s take DeFi for example. 10 years ago, DeFi wasn’t even thought about let alone invented. The concept of people being able to trade digital tokens, assets, or shares of a company, outside of a monitored and regulated market exchange was just in its infancy. But now we see that blossoming and becoming bigger than ever. This is where the utility of Bitcoin and other digital assets are starting to shine.
Speculating on the utility of these new and upcoming digital platforms and assets is a large part of what’s driving the price and enthusiasm.
Security is a large part of what makes something valuable. If it’s easily stolen, lost, or forgotten, that is a deterrent. A large reason people don’t carry around big sums of cash is security. It’s pretty easy to lose your wallet or purse thus losing your cash. However, it’s much harder to break the security on someone’s bank account or credit card. Even if your card gets stolen, chargebacks and security features of banks secure the consumer from these types of losses.
This is where a lot of digital currencies and assets have some work to do. While it is true their cryptographic nature makes it near impossible to hack or outright steal, the concept of storing and securing this new asset class is hard to understand for the newcomer.
Self-custody is a foreign concept to a lot of people in the era of banks. We’re so used to having our money deposited in the bank, using our debit cards to purchase, and never having cash, that self-custody (storing and controlling our own money) has been lost on us. And while storing Bitcoin is a lot more secure than stuffing wads of cash in your mattress, it’s still prone to mistakes and user error.
The security of Bitcoin and these assets is only as good as the user understands them. While all the technical aspects of security exist within Bitcoin, it still needs some help in the user experience and usability regard. People don’t understand the concept of addresses, keys, or storage.
All this is not to say that Bitcoin isn’t secure. Digital assets are by design cryptographically secure. I’m simply pointing out that this market needs to continue to mature and become more user-friendly.
Part of what makes something valuable is the ability to use it. Your cash wouldn’t be of much value if you couldn’t spend it. Gold is hard to spend, although technically fungible. It’s hard to walk into Wal-Mart and pay for your groceries with a gold coin. Being fungible, or easily spent, is a key aspect for creating value.
Bitcoin and other digital assets will only increase in value as their fungibility increases. As it becomes easier to spend Bitcoin, and more merchants accept it as a form of payment, it becomes easier for people to use it.
More and more merchants are accepting it. This is especially true for purchasing digital goods and services. A lot of digital currencies and projects are aiming to solve this fungibility issue where Bitcoin falls short. But in general, as time goes on, and it is easier to spend these currencies, coins, and assets, fungibility will improve thus increasing value.
This is where digital assets and currencies will be a strong leader. Again, people are increasingly moving away from carrying cash because it isn’t very portable. Sure, small amounts of cash are portable, but when you get into large sums, it’s cumbersome. No one walks into a car dealership with a suitcase full of cash and purchases a car. You don’t get paid at your job in quarters.
Digital assets, much like credit cards, can be carried around easily on your phone. You can tap to pay with Bitcoin just like you can with a credit card. And you can, quite frankly, carry around millions of dollars of Bitcoin on your phone and no one would know.
Being portable and accessible is an enormous factor that will drive, and is driving, this digital revolution.
So How Does Bitcoin Have Value?
All of these things add to the value proposition of Bitcoin, Ethereum, Litecoin, Polkadot, Cardano, and the numerous other projects aiming to tackle these problems. Bitcoin ticks all these boxes. Albeit, it excels in some areas more than others, but it is a project that aims to tackle all of them and more. It’s a reinventing of cash, credit cards, a store of value, and so much more.
All of these things combined are what makes Bitcoin valuable.
Yes, at its core, it’s just some lines of code.
But they are secure lines of code, that have demand, security, portability, and fungibility.
Certainly, the speculative nature of the market is driving the value of Bitcoin and other digital securities and assets through the roof right now. But the list of concerns preventing people from investing and using Bitcoin is quickly dwindling. Custody, access, and regulation are issues that are rapidly being worked out. Those are valid concerns, as are value and price. But if those objections are holding you back from taking an honest look at the opportunity of this new landscape, I urge you to look further and deeper.
I hope this has helped you better understand a little more about the value of Bitcoin and other projects that are emerging. If so, I urge you to dig deeper and start to understand how this panorama of projects is going to change the financial landscape forever.