What Makes Bitcoin Valuable?

Currently, Bitcoin world’s largest cryptocurrency. As I write this, the value of a single bitcoin is a little over 47 000 USD. At the rate, Bitcoin has grown, especially since 2019, it is most likely going to be a mainstream currency in the foreseeable future.

Bitcoin is also subject to the laws of supply and demand. Since the rate of supply of bitcoin is growing slower than the demand, the value of Bitcoin has been increasing over time. We can also attribute this to the fact that governments are printing a lot of fiat money. Let us compare the US Dollar to Bitcoin using some of the factors that contribute to the success of a currency.

These factors include:

· Scarcity

· Divisibility

· Portability

Scarcity

Scarcity in regards to currency refers to a limited supply of currency in circulation as compared to its demand. Simply put, currencies derive some of their value from being scarce. Think of it this way having something of value that another party doesn’t have, gives you bargaining power while transacting with any other parties involved.

Due to a growing economy, the government regularly prints dollar bills. Usually, this is done by central banks to make sure that there is enough cash flow in circulation. This weakens the US dollar with time.

In contrast, however much bitcoin gets accepted as currency, there will never be over 21 000 bitcoins. So, as its demand increases, so will bitcoin value. This somewhat proves that bitcoin is not just a speculative bubble.

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To prove this analysis, we will look at bitcoins price history to determine just how much is bitcoin worth. At the beginning of 2013, the value of a single bitcoin (BTC) was about $13.35. By the end of the same year, the value of a bitcoin had risen to about $760. In between, at around October of the same year, the value had risen to a high of $1,1156.10. As of November 2021, Bitcoin has at some point, hit a record high of $68,521 for a single Bitcoin.

This information is readily available to the public via reputable crypto news websites and cryptocurrency trading platforms.

Like any other currency, the value of bitcoin varies from time to time. Some might say that the value of bitcoin is very volatile. They are not completely wrong. Remember, Bitcoin is still in its early stages and is yet to be accepted as a substitute to fiat currency by the masses. This and the fact that at the beginning the value was mostly speculative, largely contribute to its volatility.

Bitcoin’s value is also derived from it being a scarce commodity. It is in some ways very similar to gold. Think of it this way, like gold bitcoin has a limit on supply. This means that if or when it gets accepted as a hard currency, bitcoin will be valuable. Also, like gold, bitcoin is highly liquid. If today you wanted to sell gold, there is always a ready buyer.

The same applies to bitcoins. There is always a ready market for bitcoin. People are always willing to trade fiat currency for bitcoin.

Divisibility

In regards to divisibility, Bitcoin might even be better as a currency when compared to gold and other currencies. Let’s use gold for instance. Gold is a highly indivisible physical commodity.

Imagine you had a ring made of pure gold which you wanted to exchange for goods, services, or even for fiat. Your options (people who are willing to trade the gold ring) are limited for a variety of reasons. Now imagine you had about 500g of gold which you also intend to use in a similar value. Still, your options are limited. So, if gold has been considered valuable since time immemorial, why all these limitations?

The answer is quite simple. Gold is highly indivisible. Most people are only willing to trade in substantive amounts of gold. With little amounts of gold, however valuable, it is practically impossible to use it for your day-to-day transactions. For this reason, most countries abandoned the gold standard for government-printed money.

In the traditional gold standard system, governments had set a fixed exchange rate between their set currency and gold. Simply put, you could always exchange your currency for gold which had intrinsic value.

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In contrast, Bitcoin is highly divisible. This might just be bitcoin’s greatest strength. It is divisible up to eight decimal places. This means that one bitcoin can be divided into 100 million units–referred to as satoshis (SATs). This factor alone makes Bitcoin a very desirable form of currency. Why? Because no matter how valuable Bitcoin gets, there will always be enough bitcoin for everyone to transact with.

Divisibility is an enormous factor for the success of any financial system. Usually, different commodities are sold for different prices. With a highly divisible currency, purchasing different commodities can be done with ease.

Take a US Dollar for example. One USD dollar is only divisible to up to 100 cents i.e.: 1USD = 100 cents. This means that you can be able to make smaller purchases up to a minimum of 1 cent.

In the case of Bitcoin, a single bitcoin (BTC) is equal to 100 million satoshis. This means that even with a very small quantity of bitcoin, say 0.0003 BTC one can still make a purchase. For the curious fellows, such as myself, at the current market rate, 0.0003 BTC is equal to $148.34.

Portability

Portability in this context refers to the ease of moving from one place to the other with a specific type of currency. Traditional currencies such as gold were inconvenient to transport and transact with. Imagine transporting 10,000 kilos of gold. Due to its high value transporting gold (even to date) requires a lot of security and planning.

The same can be said for fiat (paper money). It is risky to walk around with large amounts of fiat. This is one of the major disadvantages of fiat. Through what we can term as financial evolution, methods were devised to solve the issue of security and convenience when transporting large amounts of money.

The solution was and still is digitizing traditional currency. Banks pioneered in creating these systems where you could transfer money from one account to another just by issuing the instructions to your bank. This has presently developed to what we commonly refer to as mobile money. Bitcoin is almost similar to mobile money but much better and highly effective.

Here’s why. Bitcoin just like mobile money can be transferred digitally. With just a mobile phone you can transfer funds from your account, here in the USA to an account in Asia or Africa. While this is possible for mobile money, there is the challenge of converting one currency to another. With Bitcoin, and the reason it is much better than mobile money is: A bitcoin in the USA has the same inherent value as a Bitcoin elsewhere on planet earth.

This means that with just a mobile phone and a crypto wallet, you can transact using bitcoin with anyone from any part of the world. This concept is likely going to lead to mass adoption of bitcoin as a hard currency.