I’ve heard Bitcoin called many things in my few years in the space: ‘Magic Internet Money’, ‘Drug Dealers Money’ and even ‘F@ck You Money’. I like the last one, and I agree with it, too. But what is it that gives this magic Internet, drug dealing, f@ck you money value?
Many people who don’t understand Bitcoin can’t grasp why it has value. They think of it as a virtual currency and can’t get their heads around how a ‘virtual currency’ can have value.
The best way to understand why Bitcoin has value is by understanding its competitors, so let’s have a look at what gives other assets value first.
The Problem With Fiat Currencies
For those of you that aren’t sure what fiat currency is, it’s money that issued by governments and banks, that we use every day to buy things. Think US Dollar, British Pound and the Euro.
There, now you have a complete understanding of the problem with fiat currencies.
No seriously, the best thing going for fiat currencies, especially the dollar is that everybody uses them. We don’t know any other way. It works for a few Western societies and their currencies are pretty stable against each other, but the only thing giving them value is armies, debt and faith.
Backed By Nothing But Faith
The main problem with fiat currencies is that they’re issued by governments and banks (the very entities that get us into every financial crisis) and they are printed into existence with nothing backing them.
They used to be backed by gold, but then in 1971, President Nixon brought the US off the gold standard and with it the whole world came off. At least back then, you could redeem your paper notes for gold that was stored in vaults. But now you can’t. It’s just an IOU. Literally.
Everyone can see how bad things are getting, and to get around things, governments are trying to print their way out of it. Just like they did in 2008, and just like they will do again the next time. But the problem is as these cracks are being papered over, it’s just delaying the inevitable.
For every dollar printed into existence, it devalues every dollar in your bank account. That’s inflation, and many people don’t feel it because it’s usually around 2% a year, and they sometimes get an “inflation busting” pay rise. But the fact is: a $100 stored “safely” in your bank compounded over 10 years, would have the purchasing power of about $82.
Note that I said ‘purchasing power’ there, and not ‘worth’. Of course it will still be worth $100, because that’s how much it is. But money is only valuable against what it can purchase, and in 10 years time, that $100 would only get you $82 worth of goods.
And that’s when inflation is ‘stable’ and printing is controlled. The Fed recently announced that they would print as much as necessary to get us out of this mess. But who’s going to pay for that? You and me. Not the rich – their wealth is offshore.
Slowly but surely, however, people are losing faith in the system of banking and corporate bailouts. If you don’t agree, you should look into what’s happening in places like Argentina, which is perennially hyperinflating. People there lost faith in their government and money a long time ago, but never had another option until recently. The government has limited its people from transferring peso to US Dollar to $50 a month. They can’t limit Bitcoin purchases.
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The Problem With Gold
Another asset similar to the properties of Bitcoin: Gold. It has been used as an exchange of value since about 700 BC, when Lydian merchants produced the first coins, and as a store of value for over 4000 years.
The great thing about gold is that it’s a hard money. By that I mean it can’t be printed. Every flake of gold has been worked to get and although there is always more gold to get, it is scarce. That said, gold can be created from other elements.
However, to do that it requires nuclear reactions and its so expensive that it’s a pointless task, for now. Bitcoin can never be created from other elements.
Gold was actually used as gold coins until 1933, and was always the standard for any government’s economy until 1971. But then, well if you read the above section you know what happened…
But gold is a safe store of value and is widely respected, and investors will continue to invest in it as a hedge against government inflation.
Gold Isn’t as Useful as Bitcoin
But the problem with gold is that it can be confiscated. If you want to take some from one country to another, just make sure you don’t have too much of it, even though you paid for it and have all the receipts. You see, governments don’t like too much of it leaving their shores.
But if you’re wealthy enough to do what you like and you have a lot of it, try sending it around the world. It will take a lot of time, security and cost to execute, and you better hope it doesn’t go missing.
You can’t divide gold very easily, either, and if you want to spend it in the world’s biggest society (the Internet), you will run into all the above problems.
You see gold is a respectable store of value. It’s hard money, but it’s not very transportable, or divisible, and it costs you a lot to secure if you have a lot, and using it in the digital economy, well it’s a relic.
What Gives Bitcoin Value?
Bitcoin is similar to fiat currency in some ways, and like gold in other ways. But it’s also very different from both. Nothing has intrinsic value. Value must be earned, and earning value comes with an understanding of something’s core values.
Bitcoin’s Core Values
Bitcoin is the first decentralized digital currency. Some of its value comes from it being the first digital currency that no person, organization or government has control over. Anybody can buy it and receive it, and nobody can tell you what you can and can’t do with it.
There are no restrictions and as long as you have a connection to the Internet it’s pretty easy to get hold of. It has a limited supply of 21 million that will ever be in circulation, and every single Bitcoin ever created has been worked for.
The Scarcity of Bitcoin
Bitcoin is the scarcest asset ever created. Pseudonymous creator Satoshi Nakamoto coded into the program a cap of roughly 21 million. There can never be any more. Nobody can find more of them, nobody can put elements together to create more of them, and no government can seize control and print them. There can only ever be 21 million.
To ensure this, there’s an inflation of 900 bitcoins every day, or 6.25 for every block added to the Bitcoin blockcahin. This is paid out to the miners who work hard to produce them, but every four years or so, this block reward is cut in half.
It will continue to be halved until the last fraction of a bitcoin is created, which should be sometime around the year 2140. It can’t be speeded up or slowed down, because there’s an adjustment to the block creation every two weeks. So we know how many Bitcoin there are at any given time.
And as we know, this is completely opposite from fiat currencies, and even with gold we don’t know what the limit is, or even if there is a limit. Bitcoin is the first asset that is truly scarce.
The Divisibility of Bitcoin
With only 21 million Bitcoin it’s hard to imagine how there could be enough to go around. After all there are almost 8 billion people on earth.
Well every Bitcoin is divisible by one hundred million. Every 0.00000001 Bitcoin is called a satoshi after the creator of Bitcoin, and every satoshi means there quadrillions of them to be distributed into the global economy.
This is important because of the digital age we are in. The Age of Internet needs something that can utilized seamlessly on the internet.
The Utility of Bitcoin
For anything to be a money it has to have utility. And although it’s not used as much as the detractors claim it should be, it is the perfect technology for Internet money.
The Internet is the biggest society in the world. According to Statista, about 4.57 billion people use the Internet. And the Internet knows no borders, especially if you have a VPN.
This society now has a way of transacting with a currency that can’t be stopped. It doesn’t matter which borders you want to send it over, if you want to send some, it will get there.
And because Bitcoin is secured through its decentralized network, and transactions don’t need to be verified by a costly bank or credit card company, these transactions can be done without the need of third parties.
The Transportability of Bitcoin
Try taking $10,000 of cash or gold through an airport and see what questions you’re asked when you’re taken into a back room. You’ll be guilty until proven innocent, and the governments will stop you taking so much cash or gold anyway.
With Bitcoin wallets and exchanges, anybody can send any amount anywhere at anytime and nobody can stop it. Anybody can send value to anybody else in a fraction of the time and a fraction of the cost.
It’s a seamless way of transacting value, and it’s much faster and cheaper. It will save lots of time and money for anyone or any business, and it can all be done with the knowledge that its being sent across the most secure network ever created.
The Security of Bitcoin
The cost of creating a bitcoin today is roughly $12,500. Most of these costs are down to electricity, and many believe that it’s a waste of valuable resources. But the truth is Bitcoin and Bitcoin mining is actually promoting green energy innovation.
The cost of creating a bitcoin is part of what makes Bitcoin hard money. If you could just do it with little to no cost, it wouldn’t give much value to Bitcoin. And it’s part of the cost creation that helps make it the most secure network ever.
And that secure, decentralized network means we have an asset, a money that is out of the government’s control. A money that can’t be printed at will to pay for wars, and a money that can’t be printed to help failing businesses.
Think about it, we now have a money that is actually driving energy innovation, and one that can actually help bring peace and stop corruption.
Why Bitcoin Is Valuable
Bitcoin was born on the Internet in the Age of The Internet. It is the first Internet only currency and cryptographic algorithms that protect our data are used to secure the Bitcoin network.
It has never been hacked, and with every block added to the Bitcoin blockchain, it secures it that little bit more.
Every bitcoin in existence has been worked for, and the network won’t allow anybody to print more than what is coded.
Bitcoin’s market cap of $175 billion at the time of writing, and that’s more than most countries GDP, including Qatar and Hungary. Not bad for an 11 year old currency.
It’s a drop in the ocean of the global economy but for every dollar invested in Bitcoin is a lack of faith in government money, and that lack of faith is growing.
In the Age of Printing Infinity, people are losing faith with their governments, and as we slide in and out of more government induced messes, that faith will move more towards Bitcoin.
Author: Tommy Limpitlaw