A bitcoin has value because it is able to be exchanged for and used in place of fiat currency, but it maintains a high exchange rate primarily because it is in demand by investors interested in the possibility of returns.
Of course, many other factors influence Bitcoin's value. Read on to learn more about why Bitcoin has value.
Key Takeaways
Bitcoin has value because it can function as a store of value and a unit of exchange. It also demonstrates six key attributes that enable its 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 primary source of value lies in its restricted supply and increasing demand.
Why Traditional Currencies Have Value
Throughout history, many items have been used to exchange value—shells, beads, animal skins, and gold are well-known examples. In this respect, these items are regarded as "money." Money doesn't have to be the printed currency we are all familiar with—all it needs is to act as a store of value, be recognizable as a unit of account, and be accepted as a medium of exchange.
So, if an item meets those criteria, it is money. However, to be successful and long-lasting, it must have:
Scarcity: It must not be a widely available resource
Divisibility: Currency should have many denominations
Acceptability: The intended audience must accept it
Portability: It must be able to be carried around and exchanged
Durability: Currency should have a long life span time
Uniformity: All denominations should be identical not be easily reproduced
Value is then assigned by the users based on its supply, demand for the currency, how much it is worth to them, and how much of a given good or service it can purchase.
The image below compares many different value attributes of gold, fiat, and crypto.
Why Does Bitcoin Have Value?
Cryptocurrency displays the same attributes a fiat currency system does. Here's how it meets them:
Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis.
Acceptability: More and more people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them because their financial systems are failing them. Businesses are accepting them in greater numbers, and more consumers are using them.
Portability: Bitcoin is able to be used across borders, allowing any consumer with an internet connection to participate in the global economy and have access to financial services.
Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
Uniformity: Bitcoins cannot be counterfeited, and don't have a phyical appearance, although there are renditions of coins that represent Bitcoin.
As Bitcoin has also become accepted as a medium of exchange, stores value, and is recognized as a unit of account, it is considered money.
But its exchange rate, the value most often associated with the coin, isn't so much a factor of the people that use bitcoins in transactions; it's the investors buying the cryptocurrency hoping for profits, and traders buying and selling it to make money on price movements.
Because it is in demand by investors (realistically, they are speculators because they are hoping for rewards), Bitcoin commands a very high price, as demonstrated by the exchange rates it has experienced in the past. At one point, 1 BTC was worth less than $1—one decade later, that same bitcoin would have been worth more than $66,000. Prices have decreased dramatically since November 2020, but this volatility has many hoping for a market repeat—additionally influencing Bitcoin's value.
Why Do Some People Believe Bitcoins Are Worthless?
Like any asset or thing of value, the price people are willing to pay for Bitcoins is a socially agreed-upon level based on supply and demand—but some are unwilling to accept that value can be assigned to a digital item. Because of this unwillingness to accept that digital items 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 what could be considered a fair 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.
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. Some place estimates at about $18,000 per bitcoin.
The Bottom Line
Like all forms of currency, Bitcoin is given value by its users, supply and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
Because it is in demand by investors (realistically, they are speculators because they are hoping for returns), Bitcoin commands a very high price, as demonstrated by the exchange rates it has experienced in the past.
Bitcoin's price changes because of its supply, the market's demand, media and news, and regulatory changes. Some research suggests that the cost of producing a bitcoin also influences its prices, but most reports used assumed data rather than facts.
Bitcoin runs on a decentralized computer network or distributed ledger that tracks transactions in the cryptocurrency. When computers on the network verify and process transactions, new bitcoins are created, or mined. These networked computers, or miners, process the transaction in exchange for a payment in Bitcoin.
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. This removes the need for trusted third-party involvement (e.g., a mint or bank) in financial transactions.
Backing a currency is done by the currency's issuer to ensure its value. Bitcoin, gold, and fiat currencies are not backed by any other asset. Bitcoin has value despite no backing because it has properties of sound money.
Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence. Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis.
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, is believed to own the most bitcoins, with estimates suggesting over 1 million BTC mined in the early days of the network.
However, some estimates can be made based on blockchain data and surveys of Bitcoin holders. According to data from Bitinfocharts, as of March 2023, there are approximately 827,000 addresses that hold 1 bitcoin or more, representing around 4.5% of all addresses on the Bitcoin network.
Cryptocurrency gains value when demand rises higher than supply. The supply mechanism of a cryptocurrency is always known; each crypto publishes its token minting and burning plans. Some, such as Bitcoin, have a fixed maximum supply; we know that there will only ever be 21 million Bitcoins.
Why should you know how many bitcoins exist and how many are left to mine? Limited Supply: Bitcoin has a maximum supply of 21 million coins, and as of March 2023, more than 19 million have been mined. Remaining bitcoins: There are approximately 1.5 million bitcoins left to be mined.
The shortest amount of time it can take to mine at least 1 bitcoin is about 10 minutes. However, the actual time it can take you depends on several factors such as the hashing power of your mining hardware, the overall network hash rate, and the Bitcoin mining difficulty.
If you're a cryptocurrency investor riding the current wild wave of the bitcoin rally, then the thought has probably crossed your mind: Can I buy a house with crypto? The short answer is yes—and we've got the home listings taking bitcoin offers to prove it.
The worth of a Physical Bitcoin is twofold: the market value of the digital Bitcoin it holds and its collectible value. The latter can far exceed the actual Bitcoin value due to rarity, material (some are made of gold or silver), and historical significance.
It's not a good idea to invest in cryptocurrency unless investors are prepared to lose all the money they have invested. This is because cryptocurrency is an extremely high risk and complex investment, and investors are unlikely to be protected if something goes wrong.
Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.
One of the primary reasons behind Bitcoin's value lies in its limited supply. Unlike traditional currencies that can be endlessly printed by central banks, Bitcoin operates on a fixed supply schedule. The total number of BTC ever to be in existence is capped at 21 million.
The value of Bitcoin (BTC), unlike traditional fiat currencies such as the Euro or the U.S. Dollar, is not determined by a centralized authority like a central bank. Instead, Bitcoin's price is determined based on supply and demand. Bitcoin has a supply cap where no more than 21 million BTC will ever exist.
On 31 October 2008, a link to a white paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.
The New Liberty Standard Exchange recorded the first exchange of Bitcoin for dollars in late 2009. Users on the BitcoinTalk forum traded 5,050 bitcoins for $5.02 via PayPal, making the first price mediated through an exchange a bargain basem*nt price of $0.00099 per bitcoin.
Introduction: My name is Pres. Lawanda Wiegand, I am a inquisitive, helpful, glamorous, cheerful, open, clever, innocent person who loves writing and wants to share my knowledge and understanding with you.
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