If you put yourself in the shoes of a value investor it is hard to see why Bitcoin has any value. It produces no revenue and no products. And the worst part is that it isn’t even backed by any government. Even El Salvador doesn’t back Bitcoin with anything. Instead, the country simply recognized BTC as legal tender. Market participants are willing to pay high prices for BTC. At the time writing one Bitcoin is still worth 32.611 Euros.
Why is Bitcoin worth something? How do you measure the worth of a commodity that aims to be a currency and is not backed by any government?
Why do Bitcoins have value?
Bitcoin is used for different purposes. Some investors think that it is a scarce commodity that can protect them from inflation. Others are more into the aspect that it can be used for payments and insist that Bitcoin is the currency of the internet.
There is indeed a similarity to precious metals in respect to the scarcity of Bitcoin. In fact, Bitcoin’s supply is limited to roughly 21 million BTC. This makes Bitcoin ultimately scarce because there is a finite supply that cannot be manipulated. But scarcity alone doesn’t achieve anything. A painting of an artist who lived 200 years ago is also scarce, but if nobody is interested in his art it is considered rare, but it’s not valuable.
Since we can rule out that scarcity alone grants value, we have to add what’s missing:
- Bitcoin can function as a store of value
- It is a unit of exchange
- BTC also has the attributes of a useful currency
What is a useful currency?
A currency has to adhere to 6 standards in order to be considered useful:
- Scarcity: We already explained that Bitcoin has a finite supply.
- Divisibility: You can devise Bitcoin easily. A Satoshi is the smallest denomination of Bitcoin. One Satoshi is the equivalent of 100 millionths of a Bitcoin.
- Acceptability: Bitcoin is accepted worldwide by many merchants and payment providers. It is easy to accept it because all you need is a Bitcoin wallet.
- Portability: You can transact easily and carry your BTC by simply using a wallet or remembering your seed phrase.
- Durability: As long as the network is running Bitcoin doesn’t wear out.
- Uniformity: BTC is resistant to counterfeiting.
Some experts argue that Bitcoin is not money nor a medium of exchange. Others deny its ability to serve as a store of value. Despite the criticism, it can be argued that Bitcoin fulfills the criteria above.
Is there an intrinsic value to Bitcoin?
Many scientists and economical analysts have pointed out that Bitcoin has no intrinsic value. It is not backed by any institution or government which is often held up as the criteria to attribute intrinsic value to a currency and to determine its fair value.
Yet it can be argued that proof of work itself along with Bitcoin’s protocol creates intrinsic value. The miners guarantee that neither the supply nor transactions can be manipulated. Proof of work creates an immutable ledger that is effectively secured by lots of energy. There are Bitcoiners who argue that the energy that has been used is stored in each Bitcoin and cannot be brought back to do something else with it. While the Dollar is backed by the United States, Bitcoin is backed by energy. Hence its fair value is determined by the energy costs that it took to mint each Bitcoin.
It is worth mentioning that this argument can be countered simply because of the fact that there are many cryptocurrencies. While it is true that the energy cost is real one could easily fork Bitcoin or use any other coin for that matter. What is the intrinsic value of Bitcoin if tomorrow everybody is going to switch to Litecoin? The cost for the energy that has been spent on Bitcoin would go to waste.
Of course, Bitcoiners would argue that this will never happen because why should the market waste the energy that has been spent on Bitcoin instead of attributing the fair value accordingly?
Bitcoin is a revolutionary movement
Another reason why Bitcoin has value is the blockchain technology itself. Bitcoin’s ledger provides a security that is unmatched by any other cryptocurrency up until this day. This allows second layer protocols and sidechains to take advantage of that security while they can serve a very different use case at the same time.
Many people believe that it is this groundbreaking technology that is deeply rooted in the open-source community and the idea that every human being should have access to its benefits. Bitcoin’s value is not only determined by the qualities of a useful currency or an intrinsic value based on energy cost. Its protocol allows everyone to transact freely and without the need for an intermediary.
Its blockchain is transparent. It’s granting its users pseudonymity while at the same time allowing everybody to check for the validity of each transaction and the total money supply. It is the opposite of a centralized banking system that is vulnerable to manipulation by a variety of actors that are involved, that cannot be audited in the same way by the public. This is not only an idea. Bitcoin is capable of doing these things. People don’t need to trust people any longer, everyone can put their trust in the protocol. This alone carries a value that is part of the answer to the question of why this digital asset has increased in price from a few cents up to tens of thousands of Euros within a time span of a little more than a decade.