Crypto Network NZ

Making Bitcoin Easy

What Gives Bitcoin Its Value?

One of the reasons bitcoin has value is because, among other things, it is classed as currency, or a medium of exchange. By using currency, people are able to facilitate and simplify the trade of goods and services with a single, widely-accepted "marker of value". Over history these markers of value have ranged from gold and silver, to salt and feathers, to the system of fiat currency that we all accept and use in today's economy.

In order to be useful as a currency, the marker of value needs to have certain properties to qualify. Firstly it needs to have scarcity; it makes no sense to use grains of sand as currency since sand can be found all over the world and is in plentiful supply. Secondly it needs to be fungible, meaning it is interchangeable or exchangeable with other individual goods or assets of the same type. Not all watermelons are created equal and therefore watermelons are not fungible, so do not qualify as a good candidate for currency. The third quality which makes a good currency is divisibility. Fiat currency fits into this definition because a dollar can be divided into 100 cents. The final two qualities required are durability and transferability - the marker of value needs to stand the test of time and not disappear or wear out (bananas for instance would not qualify as they eventually turn brown and rot), and it also needs to be easily transferred from one owner to another.

Gold and Silver - long considered to be the best store of value, but not great as a currency

Bitcoin has all of these 5 qualities and therefore is a good marker of value to be used as currency:

1. Bitcoin is scarce - there will only ever be  a maximum of 21,000,000 coins in circulation. Currently just over 16,500,000 bitcoins have been minted or "mined"

2. Bitcoin is fungible - it is easily interchangeable in whole or in part with other bitcoins

3. Bitcoin is divisible - each bitcoin can be broken down into 100,000,000 units called a Satoshi

4. Bitcoin is durable - since it is a digital currency it does not degrade over time

5. Bitcoin is transferable - with 2 simple tools (smartphone and internet connection) bitcoin is VERY easy to transfer between owners

In addition to the above, bitcoin also has something known as the "network effect". This is a theory that is based on Metcalfe's law [U=N(N-1)/2], which states that the Utility (U) of a network is proportional to the square of the number of users (N). Basically, as more people hear about it and start using it, the value increases.

And the value of bitcoin has most certainly increased! At the time of writing (June 2017), one bitcoin is worth about USD $2,500, up from about $100 just 4 years ago.