As investors and traders breathlessly watch the price of Bitcoin, fortunes being made and lost on the extreme volatility of the cryptocurrency market, one might wonder why this virtual representation of value is worth so much.
While none of the modern fiat currencies are backed by gold any longer, they rely on the “full faith and credit” of governments. Whether that means anything at all is a divisive matter of opinion. Bitcoin, of course, is not backed by a government or any centralized institution, and has no physical manifestation.
With this in mind, it can be difficult not to succumb to the “Bitcoin bubble” scaremongering. However, any investment opportunity demands thorough and impartial research, so let’s take a look at some of the factors that make up the perceived value of Bitcoin.
Bitcoin payments: the popular attraction
The first thing most people think about in relation to Bitcoin is its utility as a digital currency for private, instant and global transactions. What makes them different from fiat transactions?
Bitcoin can serve as an alternative to heavily monitored payment systems, like credit cards and wire transfers. For those who value preservation of privacy, this holds a great deal of value.
The divisibility of Bitcoin and the absence of third parties in the verification process makes it a promising medium for micropayments, when a good solution for scalability is found. Reliable, scalable micropayments will revolutionize online commerce and advertisement.
Bitcoin as store of value: a deeper insight
Despite the enticing prospects of Bitcoin payments, paying for one’s lunch is probably not the most optimal use of the currency, at least not yet. For many everyday consumers and experienced investors alike, Bitcoin serves as a store of immutable value - a kind of digital gold. How so?
While central banks can print more fiat currency when they choose, the amount of Bitcoin is mathematically limited to 21 million. This scarcity, even more stringent than the scarcity of a natural resource, means that Bitcoin will not be devalued.
Today, many people in the world are living under conditions of political and financial uncertainty, fearful of their assets being seized, frozen, or dissolved after a government collapse. For them, Bitcoin can be an investment that transcends borders, dictatorships and bureaucratic barriers to entry.
Bitcoin Blockchain: the fundamental innovation
At the core of Bitcoin’s functionality lies the cryptographic innovation which is the real technological and financial game changer - the Blockchain. Essentially, Bitcoin currency was just the first application built on the Blockchain, but the possibilities of this technology are wide-ranging.
Blockchain is a programmable, natively digital technology that enables the simple and immediate execution of tasks that would be convoluted and complex in traditional frameworks. This convenience will drive the mass adoption of Blockchain, even if people will not be explicitly aware of using it - much in the way we are not always aware of using the TCP/IP protocol now.
Blockchain is already being used to build industry-disrupting applications, with the scope of Blockchain implementation growing continuously. For many investors, the overall future worth of these applications, which is difficult to even imagine, is what gives Bitcoin value today.
The price of liberty
Finally, sentimental as it may seem, the value of Bitcoin, and the Blockchain that underlies its use, is bolstered by something that can’t be measured - the promise of financial independence, freedom from regulation and right to privacy.
Crucially, with Bitcoin, the “eternal vigilance” that ensures liberty is decentralized, distributed and implemented through automatic mathematical operations, eliminating reliance on faulty humans and potentially corrupt institutions.
It’s true that many Bitcoin functions that make it an attractive investment are now provided, often with improved usability, by various altcoins. The cryptocurrency market is diversifying, but Bitcoin remains its dominating asset, both financially and psychologically, and most altcoins’ valuations are correlated with Bitcoin.
In the end, Bitcoin has value because its users and investors believe it has value. But today, that is the case with fiat currencies as well, so it’s up to each individual consumer and investor to decide - which currency’s faith and credit is more worthy.