What Determines the Value of Bitcoin?
In this blog post, we will discuss Bitcoin’s value proposition and explain why so many investors are pouring funds into the world’s leading cryptocurrency.
Bitcoin: Money for the Internet
Before we can talk about Bitcoin’s value proposition, we should talk about what Bitcoin is first.
The Bitcoin whitepaper defines Bitcoin as a peer-to-peer version of electronic cash that enables online payments to be sent directly from one party to another without going through a financial institution.
Bitcoin started out as a novel peer-to-peer online payment system that enabled anyone across the globe to store, send and receive money online – in the form of bitcoin – and without the need for a financial intermediary, such as a bank. The Bitcoin network achieves this by deploying a combination of complex cryptography, economic incentives, and a distributed consensus protocol.
Bitcoin: Gold 2.0
Over the years, Bitcoin evolved, moving away from its roots as digital cash to become a new type of digital asset akin to gold. That’s why Bitcoin is more often referred to as “digital gold” than a digital currency.
Today, Bitcoin’s attributes are very similar to gold. Like gold, Bitcoin is
However, Bitcoin has a number of characteristics that many believe make it superior to gold, which is why it is also referred to as “gold 2.0.”
So, let’s look at the benefits that Bitcoin has over gold.
- Whereas gold is difficult and expensive to transport in large quantities, billion dollars worth of bitcoin can be transferred across the globe within minutes and for only a few dollars in fees.
- Bitcoin’s total supply is mathematically proven, whereas the supply of gold is unknown. At a time where deep-sea mining and – according to Elon Musk – asteroid mining will soon be a possibility, the supply of gold may actually be much larger than the gold industry claims.
- Whereas gold can be counterfeited, there can be no “fake bitcoin” in circulation. The Bitcoin network’s 10,000+ node operators ensure that no “fake” bitcoin transactions can take place.
- Unlike gold, bitcoin can easily be used to pay for goods and services. While the cryptocurrency may have lost some of its digital cash features due to increasing on-chain transaction fees and bitcoiner’s propensity to save instead of spend, bitcoin remains a viable form of digital money. Especially when using second-layer solutions, like the Lightning Network, for payments.
Bitcoin’s Unique Value Propositions
In addition to providing a peer-to-peer payments network free from government intervention and a superior store of value to gold, Bitcoin comes with its own unique features that add to its value propositions.
Arguably, the biggest feature of Bitcoin that has helped to turn the cryptocurrency into what it is today is censorship resistance. Being censorship-resistant means that no government or bank can prevent you from holding or using bitcoin.
While the need for a censorship-resistant store of value and payment method may not be pressing in countries like the United States or Switzerland, for individuals and businesses in oppressive regimes or collapsed economies, the situation looks very different.
In addition to censorship resistance, Bitcoin has a hard-coded disinflationary monetary policy. In a time of central bank money printing and devaluing currencies in real terms, holding money in bitcoin as a store of value is widely considered a powerful hedge against the devaluation of fiat currencies.
Again, this feature of Bitcoin is needed more in some parts of the world than others, but even in the United States and Europe, where inflation is on the rise, holding some money in bitcoin could mean protecting your wealth from inflation.
Finally, bitcoin is programmable money. What does that mean? Because Bitcoin is essentially “just” code, you can program bitcoin payments to behave in a certain way. For example, you could stream micropayments via the Lightning Network so that you pay for every minute you listen to a DJ live set automatically.
The programmability of money is something that has only been somewhat addressed by open banking APIs in the traditional finance sector. With cryptocurrency, it’s a reality today.
Bitcoin’s Meteoric Rise to $60,000
The world’s leading cryptocurrency managed to grow from zero in value to over $60,000 in early 2021 not only because of its powerful and unique value propositions but also because of the network effect.
The network effect states that the value and/or utility of a product or service increases the more people use it. That has definitely been the case for Bitcoin.
In the early days of bitcoin, when “nobody” was using it, it had very little utility and value. However, as more and more participants joined the Bitcoin network and community, the cryptocurrency’s utility and value grew. At first, it was miners and a handful of brave entrepreneurs who contributed to the growth of Bitcoin. Then, it was early bitcoin users. Eventually, this morphed into a massive influx of money from retail investors and venture capitalists to create a massive bull run in 2017.
Following the infamous “crypto winter” and the subsequent recovery of the price of bitcoin, corporations and institutional investors started to allocate funds towards bitcoin, with some going as far as developing Bitcoin solutions themselves.
The future of Bitcoin has never looked brighter than today, with strong institutional and corporate money backing the cryptocurrency and an army of devoted developers and entrepreneurs working hard to improve Bitcoin and its ecosystem.
- Bitcoin started as a novel peer-to-peer online payment system that enabled anyone across the globe to store, send and receive money online – in the form of bitcoin – without the need for a financial intermediary, such as a bank.
- Bitcoin has several characteristics that many believe make it superior to gold, which is why it is also referred to as “gold 2.0.”
- The world’s leading cryptocurrency managed to grow from zero in value to over $60,000 in early 2021 because of its powerful and unique value propositions and the network effect.