Bitcoin has no inherent value
Cryptocurrencies have experienced significant increases in value in the last year. But things have looked less clear in the past few months. Is now a good time to assess the value of cryptocurrencies from a more reasoned perspective?
Some things are instrumental goods, meaning they are goods because they allow us to access some other good. Intrinsic goods are good in and of themselves -- they are the thing we work to attain. So, the value of a currency is in its ability to do those things efficiently and effectively: facilitate transactions and act as stores of value.
And it remains completely unclear why Bitcoin should be a stable store of value. But how are those two issues related? If a currency is going to be a store of value, the value of it has to be stable. For a currency to have a stable value, it has to be an effective facilitator of transactions. For a currency to be that, it has to be ubiquitous.
The ubiquity of a currency, and the increase of value that comes with it, is referred to as the network effect. The more widely a currency is used, the more flexibility that currency has to facilitate transactions, which stabilizes its value, because simply, the more people accept it as a valid form of payment, the more people will use it as a form of payment.
You can only exchange with those two who also accept seashells. And, if one of you stops accepting seashells, the utility, and thereby the value, of seashells drops significantly, because the flexibility of shells as a facilitator of transactions just dropped.
So, then, the question is, in what ways does cryptocurrency improve on the technology of paper money? The relative anonymity they allow for, the difficulty to trace transactions, the inability of governments to regulate or restrict transactions, the limited amount of Bitcoin that will be printed meaning that governments cannot simply print more money in order to pay for things, thereby creating massive inflation and the potential of destabilizing and decentralizing government-backed paper currency are all points of excitement for anarchists.
Allow me to make a case for cryptocurrency in straight-forward, non-pro-anarchical terms. Money is an instrument that helps us achieve our goals. Credit has always been a good medium of exchange when those engaged in the deal considered each other to be "credit-worthy", such as the small tribes in which we initially evolved.
As societies grew, barter and cash, and then fiat currencies arose in response to problems of trust and reciprocity. So, paper money replaced trade and barter because it was a more efficient medium of exchange that also dealt with problems of trust and reciprocity.
If a cryptocurrency is going to overtake a paper currency, it will have to be a more efficient medium of exchange than paper money, while continuing to deal with the problems of trust and reciprocity. Bitcoin is a more effective facilitator of transactions than paper money. The central technology of all cryptocurrency, the blockchain, deals more effectively with issues of trust and reciprocity than a central bank.
Moreover, the distributed nature of the blockchain increases the security of the currency and makes it less susceptible to manipulation or attack than a central bank. Read: The Future of Cryptocurrencies. In it, he argues that the future of cryptocurrencies, as a legitimate form of payment, will have to lose some of the attributes that make it so alluring as a speculative asset.
This is because the things that make them so exciting -- their price swings, their volatility, their potentially lucrative payoff -- actually make them terrible currencies. So investing in cryptocurrencies might be a prudent investment, but which one that should be is a more complex question, with fewer clear answers. But, the real investment opportunity in this field might be not only cryptocurrencies but innovative applications of the blockchain. Your Money. Personal Finance.
Your Practice. Popular Courses. Login Newsletters. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Bitcoin Bitcoin vs. Ethereum: What's the Difference? Bitcoin Is Bitcoin Useless? Partner Links. Related Terms Money Definition Money is a medium of exchange that market participants use to engage in transactions for goods and services.
Bitcoin Definition Bitcoin is a digital or virtual currency created in that uses peer-to-peer technology to facilitate instant payments. It follows the ideas set out in a whitepaper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Virtual Currency Virtual currency is a form of digital currency that represents monetary value in electronic form and mostly remains outside of regulatory purview.
Ripple Cryptocurrency Ripple is a technology that acts as both a cryptocurrency and a digital payment network for financial transactions. Decentralized Market Definition In a decentralized market, technology enables investors to deal directly with each other instead of operating from within a centralized exchange.
Blockchain Explained A guide to help you understand what blockchain is and how it can be used by industries.
Is the bitcoin the new gold?
As a growing number of people become aware of and interested in Bitcoin --especially when the bitdoin tends to increase -- we often get asked:. Many people find it difficult to grasp how something which only exists digitally can have any value at all. The answer to this question is rather simple and it lies in basic economics: scarcity, utility, supply, and demand. By definition, if something is both rare scarce and useful utility it must have value and demand a specific pricegave all other things being equal. Take gold, for example. Why does gold cost as much as it does?
A Brief History of Money
The Blockchain Technology is absolutely suitable for the industries which require a middleman to carry out all the transactions. The blockchain technology is basically a Distributed Ledger Technology. Any kind of information can be stored on an open Blockchain which is visible and verifiable by each and every node of the network. As the blockchain is available to all the notes of the network any tampering done with the data in the blockchain can easily be recognized and hence this provides for a tamper-proof storing of documents. The question arises, what is the value of bitcoin? The cryptocurrencies are nothing but one of the implementations of the blockchain technology where the transactions are regarded as the information which is stored on the blockchain are regarded as the information which is stored on the blockchain. These transactions are in turn verified by a number of Nodes on the network known as miners. Since its inception in January the most prominent and notably asked question is that, what is the real value of Bitcoin?
Why Bitcoins Have Value
There has been a lot of talk about how to price Bitcoin and we set out here to explore what the cryptocurrency's price might look like in the event it achieves further widespread adoption. First, however, it is useful to back up a step. Bitcoin and other digital currencies have been touted as alternatives to fiat money. But what gives any type of currency value? Currency is usable if it is a store what real value does bitcoin have valueor, put differently, if it can reliably be counted on to maintain its relative value over time and without depreciating.
In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having relatively stable value. Rather than require individuals to carry around cumbersome quantities of cocoa beans, gold or other early forms of currency, however, societies eventually turned to minted currency as an alternative.
Still, the reason many examples of minted currency were usable was because they were reliable stores of value, having been made out of metals with long shelf lives and little risk of depreciation.
In the modern age, minted currencies often take the form of paper money which does not have the same intrinsic value as coins made from precious metals. Perhaps even more likely, though, individuals utilize electronic currency and payment methods.
Some types of currencies rely on the fact that they are "representative," meaning that each coin or note can be directly exchanged for a specified amount of a commodity. However, as countries left the gold standard in an effort to curb concerns about runs on federal 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 parties 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 likely to be susceptible to deterioration or loss of value over time. Aside from the question of whether it is a store of value, a successful currency must also meet qualifications related to scarcity, divisibility, utility and transferability.
Let's look at these qualities one at a time. Key to the maintenance of a currency's value is its supply. A money supply that is too large could cause prices of goods to spike, resulting in economic collapse. A money supply that is too small can also cause economic problems. Monetarism is the macroeconomic concept which aims to address the role of the money supply in the health and growth or lack thereof in an economy.
Successful currencies are divisible into smaller incremental units. In order for a single currency system to function as a medium of exchange across all types of goods and values within an economy, it must have the flexibility associated with this divisibility. The currency must be sufficiently divisible so as to accurately reflect the value of every good or service available throughout the economy.
A currency must have utility in order to be effective. Individuals must be able to reliably trade units of the currency for goods and services. This is a primary reason why currencies developed in the first place: so that participants in a market could avoid having to barter directly for goods. Utility also requires that currencies be easily moved from one location to.
Burdensome precious metals and commodities don't easily meet this stipulation. Currencies must be easily transferred between participants in an economy in order to be useful.
In fiat currency terms, this means that units of currency must be transferable within a particular country's economy as well as between nations via exchange. To assess Bitcoin's value as a currency, we'll compare what real value does bitcoin have against fiat currencies in each of the above categories.
When Bitcoin was launched inits developer s stipulated in the protocol that the supply of tokens would be capped at 21 million. To give some context, the current supply of bitcoin is around 18 million, the rate at which Bitcoin is released decreases by half roughly every four years, and the supply should get past 19 million in the year This assumes that the protocol will not be changed. Note that changing the protocol would require the concurrence of a majority of the computing power engaged in Bitcoin miningmeaning that it is unlikely.
The approach to supply that Bitcoin has adopted is different from most fiat currencies. The global fiat money supply is often thought of as broken into different buckets, M0, M1M2and M3. M0 refers to currency in circulation. M1 is M0 plus demand deposits like checking accounts.
M2 is M1 plus savings accounts and small time deposits known as certificates of deposit in the United States. M3 is M2 plus large time deposits and money market funds. Since What real value does bitcoin have and M1 are readily accessible for use in commerce, we will consider these two buckets as medium of exchange, whereas M2 and M3 will be considered as money being used as a store of value.
As part of their monetary policy, most governments maintain some flexible control over the supply of currency in circulation, making adjustments depending upon economic factors. This is not the case with Bitcoin. So far, the continued availability of more tokens to be generated has encouraged a robust mining community, though this is liable to change significantly as the limit of 21 million coins is approached.
What exactly will happen at that time is difficult to say; an analogy would be to imagine the U. Fortunately, the last Bitcoin is not scheduled to be mined until around the year Fortunately, Bitcoin is divisible up to 8 decimal points. The smallest unit, equal to 0.
This allows for quadrillions of individual units of Satoshis to be distributed throughout a global economy. One of the biggest selling points of Bitcoin has been its use of blockchain technology. Blockchain is a distributed ledger system which is decentralized and trustless, meaning that no parties participating in the Bitcoin market need to establish trust in one another in order for the system to work properly.
This is possible thanks to an elaborate system of checks and verifications which is central to the maintenance of the ledger and to the mining of new Bitcoins. Best of all, the flexibility of blockchain technology means that it has utility outside of the cryptocurrency space as.
Thanks to cryptocurrency exchanges, wallets and other tools, Bitcoin is transferable between parties. While it takes vast amounts of electricity to mine Bitcoin, maintain the blockchain and process digital transactions, individuals do not typically hold any physical representation of Bitcoin in the process. Generally, Bitcoin holds up fairly well in the above categories when compared against fiat currencies.
So what are the challenges facing Bitcoin as a currency? One of the biggest issues is Bitcoin's status as a store of value. Bitcoin's utility as a store of value is dependent on its utility as a medium of exchange. We base this in turn on the assumption that for something to be used as a store of value it needs to have some intrinsic value, and if Bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won't be appealing as a store of value.
Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metal. Throughout much of its history, the current value of Bitcoin has been driven primarily by speculative. Bitcoin has exhibited 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.
Bitcoin's utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces. In recent years, digital currency exchanges have been plagued by hacks, thefts and fraud. Of course, thefts also occur in the fiat currency world as. In those cases, however, regulation is much more settled, providing somewhat more straightforward means of redress.
Bitcoin and cryptocurrencies more broadly are still viewed as more of a "Wild West" setting when it comes to regulation. Different governments view Bitcoin in dramatically different ways, and the repercussions for Bitcoin's adoption as a global currency are significant.
This article will not make a case for what the market penetration will be, but for the sake of the evaluation, we'll pick a rather arbitrary value of 15 percent, both for bitcoin as a currency and bitcoin as a store of value.
You are encouraged to form your own opinion for this projection and adjust the valuation accordingly. The predominant medium of exchange is government backed moneyand for our model we will focus solely on. Roughly speaking, M1 which includes M0 is currently worth about 25 trillion U. M3 which includes all the other buckets minus M1 is worth about 45 trillion U. We will include this as click store of value that is comparable to bitcoin.
To this, we will also add an estimate for the worldwide value of gold held as a store of value. While some may use jewelry as a store of value, for our model we will only consider gold bullion. The U. Of this, 48 percent, or 58, metric tons, was in the form of private and official bullion stocks.
Since there has in recent years been a deficit in the supply of silver and governments have been selling significant amounts of their silver bullionwe reason that most silver is being used in industry and not as a store of value, and will not include silver in our model. Neither will we treat other precious metals or gemstones. In aggregate, our estimate for the global value of stores of value comparable to bitcoin, including savings accounts, small and large time deposits, money market funds, and gold bullion, come to If Bitcoin were to achieve 15 percent of this valuation, its market capitalization in today's money would be This is a rather simple long term model.
Perhaps the biggest question it hinges on is exactly how much adoption will Bitcoin achieve? Coming up with a value for the current price of Bitcoin would involve pricing in the risk of low adoption or failure of Bitcoin as a currency, which could include being displaced by one or more other digital currencies.
Models often consider the velocity of money, frequently arguing that since Bitcoin can support transfers that take less than an hour, the velocity of money in the future Bitcoin ecosystem will be higher than the current average velocity of money. Another view on this though would be that velocity of money is not restricted by today's payment rails in any significant way and that its main determinant is the need or willingness of people to transact.
Therefore, the projected velocity of money could be treated as roughly equal to its current value. Another angle at modeling the price of Bitcoin, and perhaps a useful one for the near-to-medium term, would be to look at specific industries or markets one thinks it could impact or disrupt and think about how much of that market could end up using Bitcoin.
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The real value of bitcoin and crypto currency technology - The Blockchain explained
A Brief History of Money
What exactly will happen at that time is difficult to say; an analogy would be to imagine the U. Due to banks lending some people more money than they should to buy houses that were already overpriced, the delinquency rates rapidly haev. In addition, when humans learned how to separate currency technology from money technology fiat currencieswe initiated a new era with the centralisation of currency minting the Kang empire, Roman empire, and modern society. Several European countries Greece, Portugal, Spain, Ireland and Cyprus were not able to refinance their governance debt or bail out over-indebted banks that were in trouble due to a bank run. At that point, they started to trade products for havve, like shells haave rocks, then gems and rare metals. The Austrian school of economics, bitcoih originates in the lateth and early 20th century and saw a revival during the — financial crisisrejects the classical and neoclassical views on price discovery. The U. Hackernoon Newsletter curates great stories by real tech professionals Get solid gold sent to your inbox.