Many of you probably heard how popular Bitcoin has become over the years, and you may wonder how it grew so powerful and valuable.
What we can see from outside the blockchain is a digital currency that amassed great attention, going so far as to spike institutional investors’ interest.
But if we look deeper, the Bitcoin boom wasn’t just a fluke.
On the contrary, Bitcoin has a lot going for it.
Initially, it seems to have been a necessary development in the global economy, presenting a new, courageous model of decentralized financing. Bitcoin was primarily popular among the tech-savvy population, but it gradually gained strength as the entire world moved in a virtual direction. The ongoing pandemic was the turning point when everyone started talking about Bitcoin.
The truth is it only accelerated the rise of this virtual space and the rush for high adaptability.
However, since its introduction, Bitcoin’s purpose has remained the same: an alternative to fiat money with a precisely outlined set of rules, free from central banks and corporate regulators.
Hence, apart from all feverish popularity and influencers’ tweets, certain traits give Bitcoin a currency value, the very same we consider when discussing all other fiat currencies.
And as most Bitcoin-related statistics show, the interest, usage, and ecosystem surrounding cryptocurrency have grown significantly.
Here, we’ll discuss on what basis Bitcoin keeps shaking the ground of the international economy. What does make Bitcoin valuable?
Bitcoin as a Currency
Bitcoin was designed to perform the same role as money. In general terms, money features three main functionalities: a store of value, a medium of exchange, and a unit of account.
No legislation globally recognizes Bitcoin as a legal tender, nor does it forbid cryptocurrencies to perform both functionalities.
Or that was the case until June 2021, when El Salvador adopted Bitcoin as a legal tender.
Store of Value
Frequently referred to as digital gold, Bitcoin seems to fit better in its role as store-of-value. But why is that?
Despite being present for over a decade, Bitcoin and other cryptocurrencies are usually referred to as the money of the future.
If we observe Bitcoin’s price history, it’s clearly been heading in a positive direction despite the sharp and frequent fluctuations. Most price estimations based on technical analyses project realistic expectations that one unit of Bitcoin will reach around $64,336 by 2025. So, it’s a simple turnaround: people invest in Bitcoin expecting new all-time high values in the years to come.
Medium of Exchange
On the other hand, Bitcoin doesn’t seem to be fully prepared for its role as a regular medium of exchange. The reason is somewhat understandable: short-term price shifts discourage people from using crypto assets to buy goods and services even though many retailers allow crypto payments.
Based on Bitcoin’s chronological price graph, e amount of Bitcoin you’d spend on monthly rent in 2019 could easily have paid off your mortgage at the beginning of 2021.
In this regard, it’s noteworthy that Bitcoin has become a “jackpot” asset for seasoned traders diving into the newly discovered crypto-exchange marketplaces with great enthusiasm.
The big market caps and trading volumes of well-established trading platforms such as Binance and Coinbase Pro prove that the volatile market provides a suitable environment for those who want to earn from price speculations. Furthermore, Bitcoin has become commonly used as an underlying asset by several financial products such as futures, ETFs, and derivatives.
Bitcoin’s Relation to Fiat Currency
Besides these primary functionalities, several criteria define a valuable currency. Let’s see to what extent Bitcoin fits these qualifications.
The fundamental factor determining the currency’s existence is its supply. A good example would be diamonds – they are so expensive because they seem to be scarce. Thus, the limited supply drives the diamond price higher.
In any case, an excessive supply of a currency will result in devaluation, leading to huge spikes in the price of goods and services, which can, in turn, lead to a financial crash.
The opposite scenario is also unfavorable for economical maintenance. When it comes to Bitcoin, the creator(s) specified its supply in the protocol according to which Bitcoins total supply would be limited to 21 million Bitcoin units.
To get a clearer picture, currently, there are approximately 19 million BTC in circulation, coming out at a decreasing release rate called halving.
More specifically, since this asset is primarily acquired through Bitcoin mining, each time a Bitcoin miner provides a solution to a complex puzzle, they are rewarded with a certain amount of Bitcoin, known as a subsidy. Every four years, the subsidy is halved. At the moment of writing, it’s around 6.25 BTC. After the event, the per block reward paid to miners will drop from 6.25 BTC to 3.12 BTC, bringing the cryptocurrency’s inflation rate down to 1.1%
Utility represents the currency’s effectiveness. I.e., the ability of a currency to allow its users to trade its units in exchange for various goods and services.
In fact, this was the reason why currencies were initially created. This is where Bitcoin and all other altcoins like Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) show their strength.
Cryptocurrencies are run on a blockchain network, which is entirely trustless by its very nature, meaning that transactions don’t need to be based on trust to be executed seamlessly. The Bitcoin network does so through a robust system consisting of automated verifications and checks and shows extraordinary flexibility to maintain utility outside the crypto ecosystem.
An affluent currency must feature a flexible divisibility system to set a convenient basis for fulfilling its role as a medium of exchange. As a result of the strictly limited supply, Bitcoin fractions are substantially smaller than US dollars, British Pounds, and all valid cryptocurrencies worldwide. That being said, the smallest unit that Bitcoin can be broken into equals 0.00000001 BTC. That subunit is called a Satoshi, named after its founder(s).
The complex blockchain technology and the ledger on which transactions are recorded don’t allow Bitcoin to be easily “counterfeitable”.
Technically, when somebody produces a fake Bitcoin, it can be done only through the double-spend method, meaning that the scammer managed to create a double record. If this happens, the user will spend the same unit of Bitcoin several times in different settings. However, such a situation is almost impossible to come true in reality, as the blockchain is designed to prevent it.
In order to achieve proper effectiveness, a currency has to maintain decent durability. Bitcoin doesn’t have a tangible representative in the actual world, so it automatically passes the durability test. This means that Bitcoin can’t be physically damaged, lost, or stolen.
However, this shouldn’t lead you to the wrong conclusion that Bitcoin is invulnerable to malicious actions.
Bitcoin is stored in a digital wallet that records your transactions and encrypted private keys. Once you lose your private keys, you lose ownership of your funds. The Bitcoin, however, is not destroyed in this case; it’s just you that don’t have access to it.
People are massively shifting toward digital payments and e-shopping routines, so easy transportability is a key feature of a valuable currency in a world where virtual payments have already beat cold banknotes. Cashless payment is a typical example of the so-called “Network Effect,” which suggests that the value of a particular product increases as more people are utilizing it.
In the cryptocurrency sphere, the existence of different sorts of wallets and cryptocurrency exchanges has upgraded this feature, allowing funds to be transferred in real-time, irrespective of the type and the size of cryptocurrencies being exchanged.
Exchanges also offer fiat gateways with multiple payment methods, such as credit cards and PayPal. On top of all that, costs for interparty crypto transactions are drastically lower than regular transnational orders.
After all, it’s simple math: as Bitcoin gets closer to the maximum limit, its demand is reaching new heights.
The favorable ratio between its supply and demand is reliable proof that the value of Bitcoin is likely to grow even higher than we could imagine. Furthermore, corporate investors are putting considerable trust in this new wave of financial practices, setting a solid ground for Bitcoin’s utility as a medium of exchange despite the initial lack of intrinsic value. Nonetheless, nothing can be taken for granted in the volatile field of cryptocurrency.