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Bitcoin is valuable, because people believe itâs valuable. And this is perhaps a more important question - why do people believe Bitcoin is valuable?
Then again, why do people believe US Dollar is valuable? Or why has gold steadily appreciated in its value throughout the last 5000 years?
Weâll try to answer all of these questions here and connect them to the value of Bitcoin. Let's look closely at the following topics:
Letâs look at the 2 most common scenarios for why people believe Bitcoin is valuable.
Scenario 1: People believe Bitcoin is valuable because other people believe Bitcoin is valuable.
If this were the only reason for people investing in Bitcoin, it would be a very short-sighted endeavour. In fact, this would be closer to a traditional pyramid scheme.
You always want to get to the core of why something is valuable. Why did the first people in 2010 mine Bitcoin? Why did early adopters in 2012 buy Bitcoin?
It turns out there is another scenario at play here.
Scenario 2: People with deep understanding believe Bitcoin is valuable because of its properties, current and future use cases.
It turns out that early Bitcoin adopters started being interested in Bitcoin not because it was a get-rich-quick scheme.
No, they were interested in it, because of its unique properties. Such unique combination of interesting properties have never been seen in a form of money before.
This was of course enabled by Satoshi Nakamoto, who introduced Bitcoin to the world in the late 2009. You can read everything about Satoshi and early Bitcoin days in our complete guide.
Satoshiâs most important contribution is that he (or she) finally made a working version of a decentralised digital money.
Letâs go back to the mix of Bitcoin properties that I mentioned before. Letâs look at them more closely:
The first six properties above are not unique to Bitcoin. They are basically the same properties that have made gold such a good store of value for the last 5000 years.
But Bitcoin takes all the properties of gold and enhances every single one of them. Letâs take a look at a few below.
Scarcity? - We know there will always be only exactly 21M bitcoins ever created. Nobody can create more out of nothing.
Divisibility? - You can divide a bitcoin down to 8 decimal places (this could be adjusted later if needed).
Transportability? - Itâs much easier to transfer bitcoins than gold. Bitcoin transactions are propagated instantly and completely settled within an hour. Compare this to transferring a gold bar across the globe.
I would encourage you to watch the short video below. It talks about history of money and why Bitcoin might turn out to be a better form of money than gold:
Hopefully, weâve established a solid argument for why early Bitcoin adopters started using and believing in Bitcoin. But not everyone has time and willingness to study these properties or digging into Bitcoinâs complicated protocol. In fact, most people donât.
The important thing is, that at its core, there are people that understand it. And that the deeper you dig, the more arguments you find for why itâs valuable. This is quite opposite to pyramid schemes - where the deeper you dig, the less value you find.
Let me give you an example of a concept of value that we all agree on: A 100 US Dollar bill. By itself, itâs just a piece of paper. It has no intrinsic value.
Yet we all agree that a US Dollar has value. It derives its value from the widespread usability: you can pay for goods and services with it. You can pay taxes with it. You can save it and know that its not going to lose a lot of value over time.
And this leads us to perhaps the most interesting concept around BitcoinâŚ
Interesting technological properties alone are not enough for something like Bitcoin to become really valuable and used in everyday life.
This is crucial: Bitcoin has to be usable to be valuable. Its value will, in the long-term, follow its usability.
Itâs worth emphasising that even if Bitcoinâs main feature becomes âjustâ long-term store of value and Bitcoin fully replaces gold, thatâs highly, highly valuable. The price of 1 bitcoin would in this case be close to $500,000 (this is calculated from the current implied market cap of gold - close to $8T).
But letâs get back to Earth - currently weâre still far from the above scenario. Even though Bitcoin has been around for almost 10 years now, itâs still extremely immature, young and thus volatile.
Yet, the Bitcoin multi-sided network effect is in full effect. Let me explain how it works and who the various stakeholders that keep reinforcing it are:
I believe, you can see the pattern. More use-cases attract new stakeholders and new stakeholders open up new use-cases.
You can see a very good video on this here:
Perhaps the most important participants in this are computer programmers. Bitcoinâs scripting language and recent inventions like Ethereumâs even more advanced programming capabilities have opened a whole new world of possibilities for developers.
It's important to note that Bitcoin is a fully open-source project. You can see its complete source code here. This means it's never finished. Developers are constantly testing and adding more features to it - so it's actually getting better every single day.
Tens of thousands of budding crypto developers are right now in full experimentation phase. It's like the internet in the late 90s. Multiple new distributed tokens with different properties are introduced on a daily basis.
Most of these tokens will probably not survive. But some of them will most likely become extremely important and help advance industries like healthcare, social networking, property rights, and so on. You can discover and follow all of these tokens on Coincall.
Letâs remember: Bitcoin started off being worth basically 0 in the early 2009 when Satoshi Nakamoto first started the network.
Even almost a year and a half later, it was pretty much worthless - the famous first real world purchase was a guy buying 2 pizzas for 10,000 bitcoins. Yes, this amount of bitcoins is currently (April 2018) worth about $70M.
Back then almost nobody knew about Bitcoin. So even getting 2 pizzas in exchange for some weird virtual money might have seemed like a big win.
Slowly, but surely, people kept exchanging bitcoins and establishing businesses around the Bitcoin ecosystem: exchanges, merchant services, wallets, etc. Shops started accepting Bitcoin more widely. More developers started to pay attention and build services on top of it.
Itâs hard to say what Bitcoin's fair value is. Is it expensive right now? Maybe itâs cheap? It depends on your time horizon and how much you believe in its future usability.
As we pointed out before, eventually its value should be closely correlated with its usability. You believe every shop in the world is going to accept it one day? That sounds very valuable! You believe there will be a whole ecosystem of new applications built on top of Bitcoinâs blockchain? Sounds lucrative to me. You can also believe the contrary, that there won't be any use-cases for this technology. In this case, well, Bitcoin's price should hit $0 soon.