Why Does Bitcoin Have Value? Explained Simply

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Eric Huffman

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Eric Huffman

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Eric Huffman's background includes a decade plus in business management as well as personal finance industry experience in insurance and lending. A strong understanding of consumer finance combined...

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August 1, 2024 07:11 EDT

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Money has taken countless forms throughout history, ranging from beaver pelts to shells to today’s fiat currencies. In 2009, the launch of the Bitcoin network brought us a new type of money, a digital currency. This new cryptocurrency fulfills the six characteristics of sound money and, in many ways, outshines fiat currencies. Specifically, Bitcoin is more portable and more scarce.

In this guide, we’ll answer the question, “Why does Bitcoin have value?” We’ll also compare Bitcoin against today’s traditional currencies regarding its role as money and a store of value. Lastly, we’ll examine some of the arguments against Bitcoin’s intrinsic value and why some remain skeptical of its long-term promise. Let’s dive in.

However, when compared to traditional fiat currencies, like the USD and GBP, Bitcoin takes a completely different approach to sound money. The money supply of the US dollar, for example, has grown exponentially since 1960, with the largest spike in supply starting in 2020.

The US, like other nations, uses a debt-based monetary system. Each dollar is borrowed into existence and has an interest cost attached to it. It’s telling that the US public debt chart bears a striking resemblance to the money supply chart.

The money supply has to grow to service the interest. More dollars chasing goods leads to price inflation, making each dollar less valuable over time.

Bitcoin, on the other hand, has a fixed supply of 21 million bitcoins. The fixed supply combined with growing acceptance (increased demand) has caused bitcoin to increase in value. In 2010, 10,000 bitcoins purchased two pizzas. Today, 10,000 bitcoins are worth more than $650 million.

Bitcoin first reached $1 in value in 2011, two years after the network’s launch. In the following years, its price has reached nearly $74,000. The dramatic increase in value measured in USD or any other fiat currency can be attributed to Bitcoin’s deflationary nature. Rather than inflating supply, the total supply remains stable, but with so many HODLing (not selling their coins) and an estimated 4 million bitcoins lost, the available supply is deflationary.

Why Does Traditional Money Have Value?

Money is both a store of value and a medium of exchange. The US dollar and other currencies make it easy to exchange goods and services. The alternative would be systems like barter, which have limitations that make them impractical for most transactions. Traditional money allows us to transact in any amount needed and acts as a store of value in between transactions.

Sound money exhibits six core characteristics, ranging from portability to fungibility. Let’s examine these characteristics and why they are important for any viable form of money.

• Durability: Money should be able to withstand use as it passes from hand to hand. Today’s paper money isn’t paper at all. Instead, US notes are made of cotton and linen, making the notes durable.
• Portability: To spend money, we often have to move it from place to place. Paper and coins fulfill this requirement. The ability to move money electronically also fulfills the requirement for portability.
• Divisibility: One of the primary issues with barter centers on unequal values of the products and services between transacting parties. Traditional currencies like the USD can be divided into smaller denominations using coins.
• Fungibility: The term fungibility refers to sameness. One dollar is the same as the next in regard to its value.
• Scarcity: The supply of a currency directly affects the cost of goods and services. While the supply of USD and similar fiat currencies has grown dramatically, they typically aren’t created at will. Instead, debt provides an anchor to slow the growth in supply.
• Acceptability: To function effectively as money, a currency must be accepted as a store of value. In short, the transacting parties must have faith that the currency will allow them to use the currency for future purchases.

Compared: Why Does Bitcoin Have Value?

Bitcoin achieves the six characteristics of sound money but approaches these in a different way compared to traditional currencies. Bitcoin is portable and divisible. However, its scarcity may be its most attractive feature.

• Durability: As a digital asset, Bitcoin can’t degrade when used in transactions. However, that turns attention to Bitcoin’s network. The Bitcoin network allows anyone to create a node to help support the network and even mine Bitcoin to secure the network. While the US currently leads in bitcoin mining hash power, Bitcoin mining occurs worldwide, creating a robust network.
• Portability: Bitcoin is much more portable than cash or gold. Someone who has memorized their Bitcoin wallet’s seed phrase can board a boat or plane and take their wealth with them anywhere in the world. By contrast, US travelers traveling across the border must report amounts of cash above $10,000.
• Divisibility: Bitcoin’s smallest denomination is a satoshi, which is 1/100 millionth of a bitcoin. However, the Lightning Network, a Layer-2 network on top of Bitcoin, uses millisats, dividing each satoshi into a thousand millisats.
• Fungibility: Much like dollar bills, each bitcoin, satoshi, or millisat has the same value as others of the same denomination. This interchangeability is crucial for sound money.
• Scarcity: Ever wondered what drives Bitcoin’s price? With a capped supply of 21 million and much of the supply in offline cold storage, Bitcoin fulfills the scarcity requirement of sound money. While it’s possible to change the code to create a higher cap, the node operators vote on this by choosing which version of the Bitcoin Core software they run. Maintaining a limited supply matches their own financial interests, making any change in Bitcoin’s supply extremely unlikely. Every Bitcoin Halving, the rate of Bitcoin issuance goes down as well.
• Acceptability: With a decade and a half of history, bitcoin is now an accepted form of money for many in the community. Expect this trend to continue as traditional currencies continue to grow in supply.

Arguments Against Bitcoin Having Intrinsic Value

By definition, Bitcoin and other cryptocurrencies (or traditional currencies) have no intrinsic value. Intrinsic value refers to the value independent of current market gyrations. You can measure the intrinsic value of a business, for example, by measuring its cash flow and assets or of gold by its utility in manufacturing.

Bitcoin has no cash flow or yield and no real-world application other than that of being a store of value and medium of exchange. This causes skeptics to question its value. Why is Bitcoin worth anything at all? Why does cryptocurrency have value? Let’s examine the skeptical arguments.

Driven By Speculation Rather Than Utility

Critics of Bitcoin and other high-flying cryptocurrencies often point to similarities to the 17th-century tulipmania that may or may not have happened. As the story goes, Dutch traders bid up the price of tulip bulbs until the market inevitably crashed and tulip bulb prices returned to earth. Some say Bitcoin’s price is the product of reckless speculation.

Intangible Nature (No Physical Form)

Digital assets present a particularly challenging concept for some. Although we live in a world in which account balances are numbers on a screen, we know we can go to the bank and withdraw physical cash. Bitcoin will always be numbers on a screen. The specter of Bitcoin as phantom money remains and could slow adoption.

Note: Physical bitcoins do exist but they are a representation or collectible rather than a true bitcoin.

Lack of Traditional Backing

One of the main differences between cryptocurrency vs cash is that digital currencies are decentralized whilst fiat money is governed by centralized entities such as financial institutions and governments. Unlike traditional currencies, Bitcoin isn’t issued by a central bank or centralized government. The Bitcoin network creates new bitcoins as mining rewards when miners find new blocks to hold transactions.

Bitcoin custody also follows a non-traditional path. We’re accustomed to using banks to hold traditional currencies. However, Bitcoin custody requires the use of a crypto wallet. These wallets might be custodial wallets with an exchange or broker — or, in many cases, Bitcoin owners hold their bitcoins in self-custody Bitcoin wallets.

Is Bitcoin The Most Valuable Cryptocurrency?

Bitcoin’s market capitalization, currently at nearly $1.4 trillion, makes Bitcoin the most valuable cryptocurrency by far. The closest competitor, Ethereum, has a market cap of less than $380 billion. Following the top two, we see a large drop in market capitalization for other non-stablecoin crypto projects.

• BNB market cap: $85 billion
• Solana (SOL) market cap: $81 billion
• XRP: Market cap: $29 billion

Several well-known investors expect Bitcoin to rise much further. Cathie Wood of ARK Invest sees Bitcoin reaching as high as $3.8 million by 2030.

Why Can’t Bitcoin Be Copied?

Bitcoin’s code can be copied and has been forked several times to start competing projects. Still, none have gained as much traction as Bitcoin. For example, Litecoin began in 2011 as a faster and cheaper alternative to Bitcoin. Minor tweaks to Bitcoin’s code give Litecoin four times faster transaction speeds and quadruple the supply compared to Bitcoin.

Some refer to Litecoin as silver to Bitcoin’s gold. However, the 5-year performance of each shows the stark difference between the two relatively similar cryptocurrencies. Bitcoin is up nearly 700%, whereas Litecoin is down 23%.

Two primary elements that make Bitcoin successful can’t be copied easily.

• Network effect: Bitcoin has a massive user base and worldwide name recognition. Even if a superior technology came along, which arguably may have happened already, it would be difficult to shake Bitcoin from the top position.
• Network size: Bitcoin’s network size and hash power make it both resilient and incredibly secure. Recency studies on network size show that both the Bitcoin and Ethereum networks are secure enough to withstand an attack by a nation-state that wants to take down the network. Smaller networks remain vulnerable to well-funded attacks.

Conclusion

Where does Bitcoin get its value? Bitcoin’s value comes from its scarcity by design combined with portability and the network effect of being the first well-established cryptocurrency. While some of Bitcoin’s price action can be attributed to speculation, an underlying theme for investors defines Bitcoin and similar digital assets as a hedge against reckless monetary policy common to fiat currencies. As long as the supply of fiat currencies grows, Bitcoin’s price is likely to benefit as well.

FAQs

What is the point of Bitcoin?

Bitcoin was developed against the backdrop of the Great Financial Crisis (GFC) as an alternative to conventional monetary systems. Many current Bitcoin investors see Bitcoin as a hedge against reckless government spending and questionable financial institutions. Bitcoin’s finite supply of just 21 million bitcoins makes it an attractive investment for many investors concerned about inflation and currency debasement.

Where does the value of Bitcoin come from?

As with most assets, Bitcoin’s value comes from the market. Bitcoin is scarce by design, leading many investors to see Bitcoin as a safer or more performant alternative to traditional assets. Since its launch in 2009, BTC has outperformed every traditional asset class.

Why is Bitcoin so expensive?

Bitcoin is expensive if you want to buy one bitcoin, which currently costs nearly $70,000. However, each bitcoin is divisible into satoshis (1 / 100 millionth of a bitcoin), making Bitcoin an accessible purchase for average investors. Many buying platforms let you get started buying Bitcoin for as little as $1.

References

• M2 (M2SL) (stlouisfed.org)
• Federal Debt: Total Public Debt (GFDEBTN) (stlouisfed.org)
• What Is Bitcoin Pizza Day? (gemini.com)
• What Happens to Lost Bitcoin? (river.com)
• Distribution of Bitcoin mining hashrate (statista.com)
• Currency Reporting (cbp.gov)
• There Never Was a Real Tulip Fever (smithsonianmag.com)
• Circle’s USDC Stablecoin Breaks Peg With $3.3 Billion Stuck at Silicon Valley Bank (wsj.com)
• Bitcoin: A Peer-to-Peer Electronic Cash System (bitcoin.org)
• Cathie Wood says bitcoin could go as high as $3.8 million (businessinsider.com)
• bitcoin – Public (github.com)
• Coin Metrics research shows BTC and ETH are immune to 51% attacks (cointelegraph.com)