A single Bitcoin’s price has seen a massive increase since its introduction in 2009, with big ups and downs. This digital currency hit an all-time high of $60,000 in April 2021 but has fluctuated ever since. Despite the volatility, this virtual money continues to draw interest from investors from its long-term record of building and maintaining value.
However, unlike stock which has value because it represents partial ownership of a company, it is pretty hard to pinpoint the value created by a decentralized digital currency with such a short history. The drastic price swings of this electronic money make investors worried.
On the other hand, why does Bitcoin have value? Here is a guide on why this digital asset has value.
Scarcity
The value of this electronic currency is a function of its scarcity. Bitcoin has a hard limit cap of 21 million Bitcoins. So, as the supply diminishes, the demand for this digital currency increases. Investors are fighting to get a slice of this digital currency with an increasing profit from trading its limited supply.
This virtual currency also has limited utility like gold, the applications for which are mainly industrial. This virtual asset also has an underlying technology known as the blockchain, which is tested and used as a payment system. One of this digital currency’s most compelling use cases is conducting cross-border transactions.
With Bitcoin, sending remittances home is fast and cheaper. There are no limitations when sending Bitcoin across borders. El Salvador was the first country to make Bitcoin a legal tender and is betting that this digital money will evolve sufficiently to become a medium of daily transactions.
Marginal Cost of Production
People believe this digital money does not have an intrinsic value based on the marginal cost of producing one Bitcoin. Mining this digital currency requires expensive hardware that consumes a lot of energy. However, according to economic theory, in a competitive market among producers all making the same product, the selling price of that product will tend towards its marginal cost of production. Moreover, the price of this digital currency tends to follow the cost of production.
Durability
People cannot destroy this digital money. This electronic money exists as long as the blockchain exists, even on a single computer. Since the inception of this virtual currency in 2009, the network’s uptime has been a remarkable 99.99%, and it has gone more than 3,200 days without an outage. The Federal Reserve’s money transfer system went offline for several hours compared to fiat currency in February 2021.
Portability
You can send this electronic money anywhere there is an internet connection in seconds using a reliable exchange like BitProfit with a probabilistic final settlement within an hour. A Bitcoin user who has memorized their private key carries this digital currency everywhere.
Acceptability
While the total number of people who hold this digital currency is not entirely clear, some claim that Bitcoin adoption is as high as 114 million people. The number of these digital money users continues t grow daily as knowledge of the protocol spreads. Also, it is pretty easy to purchase, spend and store this virtual asset.
Inability to Copy
Since Bitcoin operates on the blockchain or a public, distributed ledger, no one can counterfeit it. The blockchain tracks the transactions and ensures the system continues to run based on the original rules set by Satoshi Nakamoto.
The Bottom Line
The price of Bitcoin fluctuates a lot. Hence it is impossible to know whether it will continue to rise in value or fall into obscurity. Therefore, allocate a small percentage of your overall assets to this digital currency.