Bitcoin (BTCUSD) is often referred to as digital currency and as an alternative to central bank-controlled fiat money.However, the latter is valuable because it is issued by a monetary authority and is widely used in an economy. Bitcoin's network is decentralized, and the cryptocurrency is not used much in retail transactions.
One can argue that Bitcoin's value is similar to that of precious metals. Both are limited in quantity and have select use cases. Precious metals like gold are used in industrial applications, while Bitcoin's underlying technology, the blockchain, has some applications across the financial services industries. Bitcoin's digital provenance means that it might even serve as a medium for retail transactions one day.
Key Takeaways
- Currencies have value because they can function as a store of value and a unit of exchange. They also demonstrate six key attributes to enable their use in an economy.
- The definition of value in a currency has changed over centuries from physical attributes to the velocity of its use in an economy.
- Bitcoin demonstrates some attributes for a currency, but its main source of value lies in its restricted supply and increasing demand.
- If the price of one bitcoin were to reach $514,000, Bitcoin's market capitalization would reach approximately 15% of the global currency market.
1:53
Click Play to Learn Why Bitcoins Have Value
Why Traditional Currencies Have Value
There are six key attributes to a useful currency: scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). These qualities allow a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.
Currency is useful if it works as a store of value or, to put it differently, if it can reliably maintain its relative value over time. Throughout history, many societies used commodities or precious metals as methods of payment because they were considered to have a relatively stable value.
Rather than carry around cumbersome quantities of cocoa beans, gold, or other early forms of money, societies eventually turned to minted currency as an alternative. The first such currencies used metals like gold, silver, and bronze, which had long shelf lives and little risk of depreciation.
Assigning value to currencies is a matter of debate. Initially, their value came from intrinsic physical properties. For example, gold's value comes from the costs of extraction and certain qualitative factors, such as luster and purity content.
In the modern age, government-issued currencies often take the form of paper money, which does not have the same intrinsic scarcity as precious metals. For a long time, the value of paper money was determined by the amount of gold backing it. Even today, some currencies are "representative," meaning that each coin or note can be directly exchanged for a specified amount of a commodity.
The idea of a currency's value began changing in the 17th century. Prominent Scottish economist John Law wrote that money—currency issued by a government or monarch—"is not the value for which goods are exchanged, but the value by which they are exchanged." In other words, the value of a currency is a measure of its demand and its ability to stimulate trade and business within and outside an economy.
This thinking hews closely to the modern credit theory for monetary systems. In this theory, commercial banks create money (and value for currencies) by lending to borrowers, who use the money to purchase goods and cause currency to circulate in an economy.
After countries abandoned the gold standard in an effort to curb concerns about gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that others will accept that currency.
Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least susceptible to loss of value over time. The value of fiat currencies is a function of their demand and supply. The U.S. dollar is considered valuable because the world's biggest economy uses it and it dominates the flow of payments in international trade.
The Value of Digital Currencies
Any discussion about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to its inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.
Here's an example. During the financial crisis, Ben Bernanke, who was then the governor of the Federal Reserve, appeared on CBS' 60 Minutes and explained how the agency "rescued" insurance giant American International Group (AIG) and other financial institutions from bankruptcy by lending money to them. Puzzled, the interviewer asked whether the Fed had manufactured billions of dollars. That wasn't quite the case.
"So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed," explained Bernanke. In other words, the Fed "manufactured" U.S. dollars through entries in its ledger. This ability to "mark up" an account exemplifies the nature of currencies in their digital form. It has implications for the velocity and use of currencies because it simplifies and streamlines transactions involving them.
Why Does Bitcoin Have Value?
Bitcoin does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network. There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, if a transaction goes awry.
The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce, and it cannot be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend. This refers to a situation in which a user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.
:max_bytes(150000):strip_icc()/dotdash_Final_Why_Do_Bitcoins_Have_Value_Apr_2020-01-f01e40e5ec7642d782ffddca3614bb20.jpg "Why Do Bitcoins Have Value? (1)")
Utility
What makes double-spending unlikely, though, is the size of the Bitcoin network. A so-called 51% attack, in which a group of miners theoretically control more than half of all network power, would be necessary. By controlling a majority of all network power, this group could dominate the remainder of the network to falsify records. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely.
But Bitcoin often fails the utility test because people rarely use it for retail transactions. The main source of value for Bitcoin is its scarcity. The argument for Bitcoin's value is similar to that of gold—a commodity that shares characteristics with the cryptocurrency. The cryptocurrency is limited to a quantity of 21 million.
Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis. Most fiat currencies can only be divided into two decimal places for everyday use.
If Bitcoin's price continues to rise over time, users with a tiny fraction of a bitcoin will still be able to make transactions with the cryptocurrency. The development of side channels, such as the Lightning Network, may further boost the value of Bitcoin's economy.
Scarcity
Bitcoin's value is a function of this scarcity. As the supply diminishes, demand for cryptocurrency has increased. Investors are clamoring for a slice of the ever-increasing profit pie that results from trading its limited supply.
Bitcoin also has limited utility like gold, the applications for which are mainly industrial. Bitcoin's underlying technology, called blockchain, is tested and used as a payment system. One of its most effective use cases is in remittances across borders to bump up speed and drive down costs. Some countries, like El Salvador, are betting that Bitcoin's technology will evolve sufficiently to become a medium for daily transactions.
Marginal Cost of Production
Another theory is that Bitcoin does have intrinsic value based on the marginal cost of producing one bitcoin. Mining for bitcoins involves a great deal of electricity, and this imposes a real cost on miners. According to economic theory, in a competitive market among producers all making the same product, the selling price of that product will tend towards its marginal cost of production. Empirical evidence has shown that the price of a bitcoin tends to follow the cost of production.
Monetarist Theories
Monetarists try to value bitcoin as they would money, using the supply of money, its velocity, and the value of goods produced in an economy. The simplest way to this approach would be to look at the current worldwidevalue of all mediums of exchange and of allstores of value comparable to Bitcoin and then calculate the value of Bitcoin's projected percentage.The predominant medium of exchange is government-backed money, and for our model, we will focus solely on that. Roughly speaking, the money supply (M1) in the U.S. was worth more than $20 trillion as of the end of 2021.
Assuming this total remains stable, if Bitcoin were to achieve 15% of this valuation, its market capitalization in today's money would be approximately $3 trillion.With all 21 million bitcoins in circulation, that would put the price of 1 bitcoin at roughly $143,000.
El Salvador became the first country to make Bitcoin legal tender on Sept 7, 2021. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.
The Challenges of Valuing Bitcoin
One of the biggest issues is Bitcoin's status as a store of value. Bitcoin's utility as a store of value depends on how well it works as a medium of exchange.If Bitcoin does not achieve success as a medium of exchange, it will not be useful as a store of value.
Throughout much of its history, speculative interest has been the primary driver of Bitcoin's value.Bitcoin has exhibited the characteristics of a bubble with drastic price run-ups and a craze of media attention. This is likely to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.
Difficulties surrounding cryptocurrency storage and exchange spaces also challenge Bitcoin's utility and transferability. In recent years, hacks, thefts, and fraud have plagued digital currency.
Why Do Some People Believe Bitcoins Are Worthless?
Like any asset or thing of value, the price that people are willing to pay for Bitcoins is a socially-agreed upon level that is also based on supply and demand. Because Bitcoins are virtual, only existing within computer networks, some people have a hard time grasping that Bitcoins are scarce and that they have a cost of production. Because of this unwillingness to accept that digital traces can hold value in this way, they remain convinced that Bitcoins are worthless. Others who understand the Bitcoin system agree it is valuable.
Are Bitcoins Fairly Valued?
The market price of Bitcoin is highly volatile and subject to large price swings. As a result, the market price at any given time may vary wildly from its fair or intrinsic value. Still, over time, oversold markets tend to rebound and overbought markets cool off. Thus, it is impossible to say at any given moment whether Bitcoins are fairly valued without the benefit of hindsight.
Is Bitcoin Money?
While Bitcoin has several money-like features, economists and regulators remain unconvinced that Bitcoin currently acts as money. This is because relatively few transactions are conducted in Bitcoins and very few things are denominated in Bitcoins. While people may trade Bitcoin in large volume and transfer value across the network, little commercial activity still takes place.
How Much Does it Cost to Produce 1 BTC?
The cost to produce one bitcoin depends on the cost of electricity, the mining difficulty, the block reward, and the energy efficiency of miners. With a block reward of 6.25 BTC, difficulty at 27.5 trillion, $0.15 per kWh, and energy efficiency of 45 joules per terahash, the cost to produce 1 BTC = $35,500.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.
FAQs
Why does Bitcoin even have value? ›
Bitcoin holds value due to its utility, scarcity, marginal cost of production, and monetarist theories. Bitcoin's rarity is reinforced by its 21-million supply limit, earning it the nickname “digital gold.”
What makes Bitcoin better than money? ›Printed cash can be prone to counterfeiting. Cryptocurrencies are designed to avoid counterfeiting, thanks to the complex network of computers that record and verify each transaction. By storing crypto transactions on a public, immutable blockchain, they cannot be changed or deleted, and everyone can see them.
What real world value does Bitcoin have? ›Any conversation about bitcoin's real-world value has to acknowledge the fact that on some level, bitcoin is valuable simply because people think it is. As of this writing, a single bitcoin is worth over $60,000 – roughly 30x the price of a troy ounce of gold – a testament to the public sentiment of bitcoin.
Is Bitcoin backed by anything? ›Bitcoin is not backed by any asset. This should be intuitive because Bitcoin is not controlled by any person or organization. Therefore, nobody is in a position to make this promise, and they would not gain anything by taking on the massive liability associated with ensuring the backing.
Why isn t Bitcoin worthless? ›Bitcoin hasn't been worthless since it was first introduced—but it is still in its discovery phase. This means that investors, consumers, businesses, scientists, and governments are still exploring its uses and value.
What happens if Bitcoin loses all value? ›One question that often arises is what would happen if Bitcoin were to crash to zero. In this scenario, the value of Bitcoin would drop to nothing, resulting in the collapse of the entire cryptocurrency market. This could potentially have significant consequences for the global economy and financial system as a whole.
What's the biggest drawback of Bitcoin? ›- Understanding cryptocurrency takes time and effort. ...
- Cryptocurrencies can be an extremely volatile investment. ...
- Cryptocurrencies haven't proven themselves as a long-term investment—yet. ...
- Crypto has serious scalability issues. ...
- Crypto newbies are vulnerable to security risks.
- Protection From Payment Fraud. Bitcoins are digital currencies. ...
- Reduced Possibility of Identity Theft. Bitcoin transactions are completely anonymous. ...
- Immediate Settlement. ...
- Direct Transfer. ...
- Greater Liquidity. ...
- International Transactions. ...
- Independent. ...
- Security.
Cryptocurrencies are not money
They do not possess the needed characteristics of money, and very, very rarely are they used as such. Instead, they are a speculative investment into a highly, volatile, immaterial asset.
It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin's computer algorithm mandates a fixed cap of 21 million digital coins (nearly 19 million have been created so far). But scarcity by itself can hardly be a source of value.
Who own the most Bitcoin? ›
Nakamoto is estimated to own approximately 1,000,000 BTC, worth around $27.13 billion. Other notable Bitcoin billionaires include individuals like the Winklevoss twins, institutional investors like MicroStrategy and governments such as those of the U.S. and China.
Why can t Bitcoin be replicated? ›As a result, you can replicate Bitcoin but you cannot instantly replicate the community. That is because buyers want to be where the buyers are and sellers want to be where the sellers are. Building such a community takes time and cannot be simply created overnight or with a fork.
Who is running behind Bitcoin? ›Satoshi Nakamoto (born 5 April 1975) is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin's original reference implementation.
What is the US dollar backed by? ›Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.
Could Bitcoin be wiped out? ›Bitcoin is considered hack-proof because the Bitcoin blockchain is constantly reviewed by the entire network. Thus, attacks on the blockchain itself are very unlikely.
Can Bitcoin go to zero? ›Peter Schiff told Anthony Pompliano that Bitcoin will eventually go to $0, but it could be after several rallies over time. After a bad 2022 for growth stocks and Bitcoin, Schiff sees 2023 being worse for many of these assets.
How long will Bitcoin survive? ›As things stand now, the very last bitcoin is estimated to be mined sometime in 2140. There are no guarantees bitcoin will survive this long, so to answer Jamie Dimon's question: we don't really know.
Do people regret not buying Bitcoin? ›Conversely, 16% of people who didn't buy crypto said they regretted not diving into the digital currency waters.
Will I owe money if Bitcoin crashes? ›If your crypto balance goes negative, you must pay back the amount owed.
What if Bitcoin becomes illegal? ›The stock market will be impacted. Bitcoin isn't just used as a currency; it's also been used as an investment. When a country announces a ban on bitcoin, the stock market usually drops as investors sell their stocks and move their money into other investments. 4.
Can Bitcoin ever go negative? ›
Cryptocurrency may be a virtual currency, but its value can never go negative. In short: The value of a cryptocurrency cannot be worth less than $0.
What can make Bitcoin fail? ›The value of cryptocurrencies mostly rely on supply and demand. If the supply of a coin exceeds the demand, the price will likely decline, but if the demand exceeds the supply, there's a good chance the price will rise. The problem with this is that the demand for an asset changes regularly.
What is the best argument for Bitcoin? ›Bitcoin is the most secure currency out there. It is mainly impervious to censorship and theft since no reserve bank or a single controller can control the system. Every Bitcoin transaction is cryptographically protected inside the blockchain, a decentralized database almost hard to hack or alter.
Will cryptocurrency replace hard currency? ›The short answer is yes, decentralized finance (DeFi) can replace banks and conventional financial systems. Cryptocurrency may readily replace cash as a store of wealth, medium of trade, and unit of account.
What is the purpose of buying Bitcoin? ›Bitcoin is a form of digital currency that aims to eliminate the need for central authorities such as banks or governments. Instead, Bitcoin uses blockchain technology to support peer-to-peer transactions between users on a decentralized network.
Is crypto the future of money? ›"The market capitalization of all crypto assets has increased by more than 60% year-to-date to $1,330 billion as of 20 April 2023," they said. Despite the recent scandals and setbacks, cryptocurrencies will likely play a role in the future digital money ecosystem."
Which cryptocurrency has the most potential? ›Which is the best potential cryptocurrency to invest in? The best potential cryptocurrency to invest in is AiDoge. The platform's native token, $AI, will let users create memes, vote on them, and earn rewards if their memes become popular.
Is Bitcoin a real or financial asset? ›Cryptocurrencies are not financial instruments under U.S. GAAP because they do not represent cash or a contract establishing a right or obligation to deliver or receive cash or another financial instrument.
Is Bitcoin a technology or a currency? ›Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions.
What is Bitcoin if it is not a currency? ›Summary. A currency can transact directly without being referenced to a market price. Cryptocurrency is not currency. The more crypto gets used for transactions the more selling pressure there is on crypto.
Can I get my money back if I got scammed from Bitcoin? ›
Cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you can only get your money back if the person you paid sends it back. But contact the company you used to send the money and tell them it was a fraudulent transaction.
How many people own 1 Bitcoin? ›Only 7% of the supply (1.356 million BTC, worth $36.4 billion) is distributed among the nearly 46.5 million addresses with at least some bitcoin — but less than one — per BitInfoCharts. The other 93% (18 million BTC, worth $482.7 billion) exists in the one million addresses that now own a full BTC.
Who controls the value of cryptocurrency? ›Because cryptocurrency is not regulated, several factors affect its value, including demand, utility, competition and mining. The cryptocurrency market can be volatile -- sometimes reaching record highs and other times dropping significantly.
How much Bitcoin does the FBI have? ›The FBI now controls more than 144,000 bitcoins that reside at a bitcoin address that consolidates much of the seized Silk Road bitcoins. Those 144,000 bitcoins are worth close to $100 million at Tuesday's exchange rates.
Does the US government own Bitcoin? ›The U.S. government currently holds 205,515 bitcoins valued at $5.66 billion based on today's exchange rates. The bitcoins were confiscated in three cases, including the Silk Road bitcoin seizure in November 2020, the 2022 Bitfinex hack confiscation, and the seizure of bitcoins from James Zhong last year.
Who became a billionaire from Bitcoin? ›Five years ago Sam Bankman-Fried hadn't bought his first bitcoin, but today, he's one of the youngest billionaires in the world thanks to the cryptocurrency, and one of the most powerful people in the young but fast-growing crypto industry.
What happens when Bitcoin can't be mined anymore? ›Bitcoin mining fees will disappear when the Bitcoin supply reaches 21 million. After that, miners will likely earn income only from transaction processing fees rather than a combination of block rewards and transaction fees.
What happens to Bitcoin when mining stops? ›When all bitcoin have been mined, miner revenue will depend entirely on transaction fees. The price and purchasing power of bitcoin will adjust to the lack of new supply. The scarcity of Bitcoin will make it more attractive to investors and users.
Can another coin replace Bitcoin? ›If you're thinking of investing in cryptocurrencies, you're probably already considering Bitcoin. But other coins, like Ethereum, Ripple, Litecoin, Cardano, Binance Coin, Polkadot, Solana, and Avalanche are strong options for diversifying your crypto portfolio.
Where is bitcoin headquarters? ›Bitcoin was founded in 2007. Where is Bitcoin's headquarters? Bitcoin's headquarters is located at Las Vegas.
How do they earn bitcoin? ›
Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.
Why is Satoshi Nakamoto anonymous? ›Anonymity was likely the only choice for Bitcoin's creators. If identities were known, it is likely the creator's lives would be upturned by the publicity. It is also very possible they would be targeted by criminals, so it might be best if they remained anonymous.
What makes the U.S. dollar so powerful? ›The dollar's value comes from the US' position as a critical global economic power and the country's political and economic stability. While it may hold less value than such currencies as the Swiss franc or the British pound, the dollar's global use makes it a more commercially viable currency.
Can America go back to the gold standard? ›The bottom line is that we don't believe we are going back to a gold standard. And as history has shown, a gold standard is not a panacea that will solve all our problems, not even the problem many argue it will solve, that is, to bring down inflation.
What is the best currency in the world right now? ›Kuwaiti dinar (KWD)
The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.
Bitcoin uses blockchain technology that guarantees its security. Blockchain ensures that no single entity can hack or shut down Bitcoin.
How far will Bitcoin decline? ›They predicted that Bitcoin could fall to $5,000 levels in 2023. Experts believe that the rising interest rates and tighter monetary policy will not allow Bitcoin to rebound sharply in the near future.
Why Bitcoin will never go to zero? ›Why Bitcoin will never go to zero is that Bitcoin's limited quantity and continually rising demand from more and more investors. Some have also referred to it as an inflation hedge.
Why is Bitcoin so overpriced? ›More merchants accept Bitcoin
The reason why the value of Bitcoin will keep increasing in the next few years is that there is a finite amount of this currency. As demand grows along with an increase in users, the value of Bitcoin will as well, as is seen from the current price of bitcoin.
Mining Bitcoin requires expensive hardware and consumes vast amounts of energy, and every four years, Bitcoin is programmed to halve the reward for mining a Bitcoin block. This is similar to gold, which gets harder to mine as you have to dig deeper into the earth's surface.
Is Bitcoin an actual coin? ›
Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions.
What happens if all crypto goes to zero? ›If the value of a crypto goes to zero, investors who hold the crypto will lose their entire investment. Additionally, the crypto network can become obsolete, and crypto will no longer serve as a mode of payment or investment.
Will Bitcoin ever be worth $1 million? ›Their confidence in Bitcoin is so strong that analysts at Ark Invest released a report claiming that its price could be worth more than $1 million by 2030. But for Bitcoin to get to that level, it would need to increase by more than 4,000% in just seven years.
Who accepts Bitcoin as payment? ›| Use Crypto For | Accepted Crypto Since | |
|---|---|---|
| Starbucks | Coffee and anything else in the store | 2021 |
| Tesla | Select items from the Tesla online shop | 2021 |
| Time Magazine | Time Magazine subscription | 2021 |
| Twitch | Buy Twitch “bits” | 2014 |
Another reason why bitcoin may never fully replace gold is that it is highly volatile. The value of bitcoin can fluctuate significantly in a short period of time, which makes it a risky investment. Gold, on the other hand, tends to be much more stable in value.
What metal is Bitcoin made of? ›A variety of physical bitcoins and other crypto coins are created for amusement as well as for collectors. The metal varieties are made of copper, brass and even silver and gold, in which case their value depends primarily on the price of the precious metal.
How much is $1 Bitcoin in US dollars? ›You can use a crypto exchange like Coinbase, Binance, Gemini or Kraken to turn Bitcoin into cash. This may be an easy method if you already use a centralized exchange and your crypto lives in a custodial wallet. Choose the coin and amount you'd like to sell, agree to the rates and your cash will be available to you.
What backs the value of Bitcoin? ›Bitcoin demonstrates some attributes for a currency, but its main source of value lies in its restricted supply and increasing demand. If the price of one bitcoin were to reach $514,000, Bitcoin's market capitalization would reach approximately 15% of the global currency market.