What makes Bitcoin valuable?

Bitcoin is valuable because people believe it’s valuable. And this is perhaps a more important question - why do people believe Bitcoin is valuable?

Let me ask you: why do people believe US Dollar is valuable? Or why has gold steadily appreciated in its value throughout the last 5000 years?

We’ll try to answer all of these questions here and connect them to the value of Bitcoin. Let's look closely at the following topics:


What makes something valuable?

Who is Satoshi? - Newsweek cover

Let’s 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 has never been seen in a form of money before.

This was of course enabled by Satoshi Nakamoto, who introduced Bitcoin to the world in late 2009. You can read everything about Satoshi and early Bitcoin days in our complete guide.

Satoshi’s most important contribution is that he (or she) finally made a working version of a decentralized digital money.


The core properties of Bitcoin

Let’s go back to the mix of Bitcoin properties that I mentioned before. Let’s look at them more closely:

  • Bitcoin is scarce: It can not be created out of thin air as oppose to government-controlled fiat currencies for example.
  • Bitcoin is durable: You can be sure that even in 100 years, as long as the Bitcoin network is up and running, you’ll be able to exchange bitcoins.
  • Bitcoin is divisible: Bitcoin is trivially easy to divide into smaller pieces.
  • Bitcoin is fungible: All units of Bitcoin are completely the same and fully interchangeable.
  • Bitcoin is portable: It's trivial to transport bitcoins from one place to another, because its digital.
  • Bitcoin is recognizable: Bitcoin transactions cannot be mistaken for any other transactions.
  • Bitcoin is programmable: Bitcoin in its essence is a computer protocol. It has its own scripting language that enables more advanced features to be developed on top of it; some obvious ones are smart contracts, payment channels, multisig, etc.

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. Let’s take a look at a few below.

Scarcity? - We know exactly there will always be only 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? - It’s 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 the history of money and why Bitcoin might turn out to be a better form of money than gold:


Properties alone do not make something valuable

Hopefully, we’ve 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 Bitcoin’s complicated protocol. In fact, most people don’t.

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 it’s valuable. This is quite opposite to pyramid schemes - where the deeper you dig, the less value you find.

Let's look at an example of value that we all agree on: 100 US Dollars bill. By itself, it’s just a piece of paper. It has no intrinsic value.

Yet we all agree that 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 it's not going to lose a lot of value over time.

And this leads us to perhaps the most interesting concept around Bitcoin…


The Bitcoin network effects

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 used to be valuable. Its value will, in the long-term, follow its usability.

It’s worth emphasizing that even if Bitcoin’s main feature becomes “just” long-term store of value and Bitcoin fully replaces gold, that’s extremely valuable. 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 let’s get back to Earth - currently, we’re still far from the above scenario. Even though Bitcoin has been around for almost 10 years now, it’s still extremely immature, young and thus volatile.

Yet, the Bitcoin multi-sided network effect is in full swing. Let me explain how it works and who are the various stakeholders that keep reinforcing it:

  • Developers: It started off with just Satoshi Nakamoto and a few other crypto developers. They were interested in Bitcoin’s promise and technology.
  • Miners: Bitcoin developers started testing and exchanging bitcoins among themselves. In order to acquire bitcoins, they also became the first Bitcoin miners. If you want to learn more about Bitcoin mining and why it's important, check this article.
  • Merchants: Some of the early adopters started offering services and products in exchange for bitcoins. Thus they effectively became the first Bitcoin-accepting merchants.
  • Speculators: Bitcoin started to appear more often in niche forums and news outlets attracting the first tech-savvy speculators. These people recognized an opportunity and made a bet on the future price increase of Bitcoin.
  • Entrepreneurs: The more speculators there were, the higher the price and more people wanted an easier way to purchase bitcoins. This led to the first real Bitcoin-enabled companies, Bitcoin exchanges that enabled people to easily trade bitcoins for other currencies. These were set up by some of the early Bitcoin entrepreneurs.

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:


Why Bitcoin developers matter so much

Perhaps the most important participants in this are computer programmers. Bitcoin’s scripting language and recent inventions like Ethereum’s 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. There are literally hundreds of developers constantly adding and submitting new feature proposals to it. This open-source nature, constant improvements and the sheer value that is on the line make Bitcoin probably the best-tested piece of software ever created.


The birth of the token industry

Bitcoin introduced the core idea of an immutable distributed ledger (also referred to as blockchain). People (mostly developers) have now taken this idea and are working on alternative use-cases beyond just Bitcoin.

Thousands of budding crypto developers are thus 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 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.


Conclusion

Let’s remember: Bitcoin started off being worth basically 0 in 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 established 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.

It’s hard to say what Bitcoin's current fair value is. Is it expensive? Maybe it’s cheap? It depends on your time horizon and how much you believe in its future usability.

Maybe you think 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 Bitcoin’s 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.