Why are Bitcoins valuable? The main advantages in contrast to fiat money
Bitcoin is more than just money. It is a complete infrastructure that allows transferring money most effectively. This is a network with a big amount of positive characteristics such as decentralization, transparency, and anonymity. It makes this cryptocurrency better than the fiat money that is managed by central banks. Maybe, all of this is familiar to you. But these are the main factors why the price of Bitcoins is growing despite the high volatility of this electronic asset.
Before we find out why the cryptocurrency is so valuable, we need to understand the fundamental economic principles about why every currency is valuable. What factors affect the currency value?
Factors of value
You can use any currency if it is reliable and doesn’t devalue too fast. In all societies, people used goods, diamonds, gold, and other items that have a more or less stable value. Money, though, is a more universal method of exchange. People didn’t know how many diamonds they could pay for or take for gold or a meal. The best type of money at that time was a coin made of gold or silver because their value was supported by the metal they were made of.
Today, money isn’t really valuable as coins in the previous time. It is made of paper and now they are only digits on the computer. The current trend is the following: paper money is being turned into electronic money.
The classical money is fiat. What does it mean? Fiat money is printed by the government and isn’t supported by real goods. It is supported by the trust of people that this piece of paper is really worth something. Today, cryptocurrency isn’t so popular. It sounds strange but fiat is more reliable than others. But this is one opinion. What are the reasons for it? What factors affect the price?
- Scarcity. It is the first reason that affects how much a certain currency is worth. If supply is too high, the prices can grow very fast. This process is named hyperinflation and is associated with an economic collapse. If the amount of money that is available in the country is too low, it also leads to economic problems. If it is a scarcity of money, the government prints new and tries to support the minimal level of inflation that makes the economy healthier.
- Divisibility. Every currency that can be used for purchasing any goods can be divided if people want. It makes money more flexible and gives the ability to show the real price.
- Utility. If a currency isn’t useful, there isn’t any need for it. People have to have the possibility to exchange money for things that they want. So, money was created to make the exchanging process easier. Also, this point says that money has to be transferred from one place to another very easily. This condition is harder to meet with precious metals and commodities.
- Transportability. The money transfer has to be easy for every member of the economy and between different counteragents in other countries.
- Durability. Every coin has to be durable: made from great materials that you can’t damage very fast.
- Counterfeitability. It is important when the coin is hard to copy by anyone. If someone copies the currency, the overall amount of money in the economy grows, which increases inflation.
How can we understand the real Bitcoin value? We can compare it with fiat money characteristics.
Comparing Bitcoin with fiat money
- Scarcity. When developers created Bitcoin, they said that the total amount of tokens will be limited to 21 million coins. At this moment, the amount of Bitcoins is more than 18 million. Now, the speed of production becomes lower and lower. In 2022, we will have more than 19 million coins. There aren’t any other facts that can prove a different point. The probability of it is extremely low. An interesting fact: the last Bitcoin will be mined only in 2140. The scarcity of Bitcoins will increase with time because the difficulty of mining will also increase. The price will also grow for this reason.
- Divisibility. You can say that 21 million Bitcoins is less than any other fiat money. How can we divide it? Easily. Bitcoin can be divided up to the smallest part called ‘Satoshi’ that has 8 decimal numbers. Bitcoin is far more divisible than other fiat currencies. USD can be divided only up to 100 times. One Bitcoin is divided up to 100,000,000 times. Even if the price of our cryptocurrency grows, we still can use Satoshi for everyday operations. We wouldn’t have a possibility to make operations with Bitcoin without this property.
- Utility. Blockchain is the greatest positive side of using Bitcoin. This is a decentralized system that works very impressively. For this reason, we don’t have to trust our counteragent to perform operations. A special system of transaction checking and confirmation has been created and plays the main role in the maintenance of the ledger. Also, Blockchain is useful outside of the digital money sphere.
- Transportability. We can transfer this cryptocurrency between different people in several minutes. The volume of operations doesn’t matter in this case. Also, the transaction fees are very low, and this is another advantage of Bitcoin. If we talk about classic money, we need several days for transferring money between countries, and the level of commissions is very high, especially if you perform an international transaction. The possibility of transferring is a very important aspect of any digital money.
- Durability. It is a very big problem for every type of money in a physical form. For example, the dollar bill is tough but it can be damaged in multiple ways. The physical damage is impossible for Bitcoin, which gives it an advantage. It can’t be damaged like a dollar bill. However, you can lose Bitcoin. If you lose your cryptographic key, you won’t be able to use your money in the blockchain. If no one knows your private key, this money can be lost for everyone.
- Thanks to decentralization, Bitcoin is very hard to counterfeit. You need to confuse every member of the Blockchain system, which is very hard to achieve. One method to counterfeit Bitcoin, though, exists. You can do the double spending of this money, although here we have some limits. You need to control more than a half of all power of this network to do it. This is very very difficult. You need to have a lot of money and computing power to perform this attack. Due to this, the probability of this happening is too low.
As we see, there are a lot of reasons why this coin is valuable. Today, though, Bitcoin isn’t a very good payment method because of high volatility. You’d better keep it in your wallet and wait for a moment when this cryptocurrency will grow. Then, you can change it to classical money and use it for anything you need. However, be very attentive when trading and investing in Bitcoin because it is associated with high risks. Diversification of your investment portfolio is a great way of protecting yourself from losses. You need to consider all available assets that can create money for you.