Why Bitcoin Is Valuable?
What is Bitcoin worth today? By the time you’re reading this article, the figure has likely changed. Maybe significantly, maybe fractionally. Say whatever you will about Bitcoin, but one thing is for certain – if you had one Bitcoin in 2013, you could’ve cashed out around $1,000. Today, you can get $30,000 for a single coin. Bitcoin has managed to continue growing, despite both experts and laymen predicting its quick and sudden downfall.
But what gives Bitcoin value? This is an excellent question because something clearly does. It is a currency, and it is an asset, but why does it seem to be growing in value?
The Greater Fool Theory
Before moving on to what backs Bitcoin value, let’s discuss why many people don’t believe it’s worth anything. Let’s discuss something referred to as “the Greater Fool Theory” in the financial world.
The idea behind the Greater Fool Theory is that a smart trader should never invest in something that doesn’t have a “real value.” In other words, if the only value of a currency (in this instance) is selling it to someone else at a higher price, it is not a smart investment.
So, the thinking here is that bonds, stocks, and real estate assets create cash flows. An investor can learn about, follow, and predict changes in these values based on research. Bitcoin doesn’t create too much value.
There are certain things online that you can pay for using Bitcoin, but with services such as PayPal, are all those crypto whales buying Bitcoin to use as a means of online payment?
The Core of Investing
Buying something that you need right now demonstrates its value to the user. If you need a new computer to play all the latest videogame releases, you buy it, and you get to enjoy those titles in their full capacity. The video gaming experience is the real value here. This goes for all products and services, from refrigerators to sports equipment.
One could argue that there is an investment aspect here. Take our gaming computer example, for instance. Yes, you get to play that newly released cutting-edge game instantly, but you can also safely assume that you’ll be able to enjoy many new titles for years to come.
But some investments are made purely for their investment value. This is what stock, bond, and real estate investment all about. You buy these assets now and sell them to someone who needs their actual value somewhere down the line.
But unlike stocks, bonds, and real estate, Bitcoin doesn’t have that actual value. One could easily assume that the crypto whales are making a textbook “Greater Fool” mistake. Why is Bitcoin so expensive, then?
A True Investment
From what we’ve just learned, we could safely claim that investment is all about predicting an increase in value. This increase prediction is based on a wide variety of factors that include the economy, supply, demand, and even ongoing world conflicts.
But let’s go back to the early 1800s. Nowadays, wars are waged for oil. Its supply is dwindling, and some countries are engaging in conflict to secure as much oil as possible.
But some 200 years ago, crude oil was nothing but a nuisance. As a matter of fact, oil discovery wasn’t at the least bit a “eureka” moment. The people who discovered oil in its crudest form were looking for water. If they found oil, it was a huge disappointment. After all, what use can a black, smelly substance have?
The problem here, for decades, has been that there was no apparent use for oil. Who would’ve thought that we were on the brink of discovering fuel that propelled the technological advancements for decades to come?
Then, George Bissell made a significant breakthrough in the mid-1850s. “Rock oil” found use in fuelling kerosene lamps. This was the first use of oil, as we know it, as fuel. Over time, one scientific breakthrough followed another and, before long, everyone who found oil early on was about to become extremely wealthy. “Smelly rock oil,” became “black gold.”
But what does this have to do with a true investment? Well, for those who saw its potential (and those who were lucky enough), oil was a true investment. It was something gathered when it had little or no value that had turned into a huge cash cow.
Is Bitcoin a True Investment?
By now, you can probably recognise the point that we’re trying to make here. That Bitcoin is, indeed, oil of our current world – a true investment.
Currently, Bitcoin is at the “kerosene lamp” point. It has some use (quick, transparent, no-fee transactions), but it has yet to achieve its real value. And when you think about it, when oil was at this stage, it wasn’t being used for planes, cars, tanks, and other machines. It was still a smelly substance with some demonstrated value, but without a bright future. Only after desulphurisation and a plethora of other improvements, did oil start to attain its real value – the immense one that it has today.
Those who had predicted oil’s increase in value, like John D. Rockefeller, have created a legacy that is still vastly meaningful today, more than a century later.
Why Is Bitcoin Valuable?
To be able to predict a rise in value for something, its potential needs to be apparent, even to a small extent. So, what is the value of Bitcoin?
Currently, Bitcoin is used for storing a person’s savings outside of the world of fiat (non-crypto) currencies. Bitcoin is independent of the state of the country one lives in and flows globally.
Another use is moving funds across borders – seeing as how no government body regulates Bitcoin, national borders present no limits. This is all thanks to the blockchain technology. In practice, a Bitcoin holder doesn’t “hold” their Bitcoin – just a private key that leads to the funds stored on the blockchain.
Then, there’s the factor that Bitcoin transactions are almost instantaneous. They don’t have to go through various financial institutions and aren’t subject to government supervision.
This is what makes Bitcoin valuable – independent, no supervision, worldwide instantaneous application.
Like with oil after its kerosene lamp breakthrough, people have yet to see the true potential of Bitcoin and other cryptocurrencies. The real use of Bitcoin has already been tested – being able to move money using the internet, at high speeds, autonomously, and independently. We already know what makes Bitcoin valuable, but its current utility is somewhat limited.
How Value of Bitcoin Increases
Given that its use is very limited, how come Bitcoin is valued at $30,000 (at the time of writing)? More importantly, Bitcoin’s value grows with each coming year. So, it is clear that Bitcoin is valuable, at the very least from its price point. Is there something that most non-crypto people fail to see?
As it turns out, there is. We’re talking about Bitcoin’s supply cap. Without getting into the mathematics of it, there will never be more than 21 million BTC in supply circulation. That is the supply cap of Bitcoin. This isn’t guesswork; it’s a plain and simple fact.
So, all those Bitcoin investors aren’t only betting that BTC value is going to increase. They are aware that its demand could increase, and the supply will remain unaltered once the 21 million cap is reached. At the moment, the supply of Bitcoin is between 18 and 19 million. This is what backs Bitcoin value.
It’s this supply limit that makes Bitcoin different than the fiat currencies. After 21 million, no one will print, make, or code any more BTC. The crypto investor is the one who determines the price of Bitcoin at the moment. People are struggling to invest in it, and the number of people who are willing to sell it is decreasing. This is why the price of Bitcoin is at a steady (if imperceptible) increase.
Then, there’s the fact that the cost of Bitcoin storage is very low. You can store it for years, while you wait for the demand to arrive.
Is Bitcoin a Safe Investment?
No investment is certain or safe. Even real estate has proven to be of questionable stability after the infamous late-2008 crash. Yes, Bitcoin is currently very volatile. But an absolutely stable and certain investment is a paradox – if everyone starts investing in something, it becomes less valuable. The greater the demand, the greater the value – it’s a story as old as modern human civilisation itself.
Does this mean that you should go ahead and invest your children’s college fund in Bitcoin? Probably not. But setting aside a few hundred dollars every other month is likely an amount that you’re comfortable parting with and won’t regret losing if Bitcoin turns out to be a “bubble.” This is the gist of smart Bitcoin investment.
Hopefully, you’ve learned a thing or two about BTC investment. Let’s summarise everything. What gives Bitcoin value? First of all, the already demonstrated application and potential. Secondly, Bitcoin’s supply cap which isn’t present with any other investment type. Thirdly, the fact that it can be stored for years at extremely low costs.
All of this, combined, is what makes Bitcoin a potential “black gold” of the future – digital gold.