Where Does the Value of Bitcoin Come From? - Our Objective Analysis

Before we talk about the value of Bitcoin or any cryptocurrency, we need to understand the value of money. Money has value because people trust it. Money is the necessary tool that you use for value exchange. When the majority of individuals in one community agree to use object X or object Y as the form of payment to exchange value and goods, you can say that object X or Y is basically money in that same community.

In the modern world, every country uses fiat money as the official form of payment to exchange value and goods in their territory. Fiat is issued by a government of a country and its policies are often overseen by the central bank. Money nowadays can be sent via digital transfer or paper notes. Many people from all around the world even instantly transfer money using simple internet banking applications.

While everything seems super practical nowadays, it is also important to note that the most valuable fiat currencies (i.e., USD or EUR) are no longer pegged to precious metals. Yes, decades ago, every $35 USD was pegged to an ounce of gold. However, the US president back in 1971 (Richard Nixon) declared that the United States of America would fully abandon the gold standard.

Since then, the value of the USD has never been backed by anything. Its value only comes from the form of trust in the central authority that controls its monetary policies. Other fiat currencies adopt similar approaches.

The stronger countries usually have stronger fiat currencies because they can dictate other countries to start using their fiat for trade. This is why the USD has so much value because it has been adopted as the world’s reserve currency by other countries’ central banks.

Keep in mind specific monetary policies have significantly impacted fiat currencies’ valuation in the long term. Money printing and interest rate policies always affect the value of the fiat currencies. With an unlimited supply of fiat and no inherent value, we will never know how much one dollar or one euro will be worth in the future. What we know is that their overall value has been going lower compared to decades ago.

Now that we are on the same page about money, it’s time to talk about Bitcoin. There are many similarities between Bitcoin and fiat money, but there are also significant differences.

First and foremost, just like fiat, the value of Bitcoin comes from the trust factor. Many crypto traders and believers trust that Bitcoin will eventually become the world’s safe haven (just like gold), and thus they buy Bitcoin in the hope that its price will go up in the future.

This buying pressure created valuation for Bitcoin and it created a snowball effect from there. For example, many stores nowadays accept Bitcoin as a form of payment because Bitcoin has a price, and these merchants can always sell back their Bitcoins to fiat.

Just like fiat currencies that are trusted by the people of the countries that issued the fiat, Bitcoin and other cryptocurrency valuations come from traders and investors who trust that the price will go somewhere.

Nowadays, many cryptocurrencies can also be used for other use cases, such as participating in DeFi (decentralized finance) applications, buying NFTs (non-fungible tokens), and even buying real-life items like shirts and shoes. But again, the main valuation comes from the trust and predictions of the crypto traders and investors.

Nevertheless, there are also big differences between cryptocurrencies (particularly Bitcoin) and fiat currencies. The biggest difference is the “monetary supply .”I put quotes around the term because Bitcoin’s monetary supply is not controlled by a centralized entity. This is the biggest difference between Bitcoin and fiat currencies. I explain below.

One of the biggest standout points about Bitcoin is its limited maximum supply. Unlike fiat currencies where they can always print more any time they wish, Bitcoin has a maximum supply of only 21 million BTCs. 

This means that the miners will never be able to mine more once the entire 21,000,000 BTCs have been mined. It is believed that the last BTC to be mined will be sometime in 2140. 

By having a limited maximum supply, the hope is that Bitcoin valuation will grow over time as long as the demand doesn’t plummet. It gives a similar impression to gold or other precious metals where the supply can’t be controlled by a centralized entity. 

When you think about it, Bitcoin’s scarcity concept is even better than gold because they always discover new gold reserves but BTC max supply remains at 21 million. Having a deflationary model helps Bitcoin to become more attractive in the eyes of crypto investors.

More impressively, Bitcoin is able to achieve this by having a massive level of decentralization. Without any central entity controlling its “monetary policies”, Bitcoin blockchain is able to maintain its narrative according to its original intent. 

The miners add and verify transactions in a decentralized way via a Proof-of-Work consensus mechanism. Everybody needs to confirm the work of each other, which makes it much harder to manipulate compared to fiat currencies, where the centralized entity controlling the fiat can do whatever they wish and print more money when they see fit.

With Bitcoin, there’s no single entity or individual that can decide everything for the entire network. Due to its massive decentralization, the Bitcoin blockchain is considered to be super safe from abuse and corrupt participants. 

Any rogue user who attempts to abuse the Bitcoin blockchain will need to do a 51% attack (in short, it’s basically a concept when a bad actor acquires over 50% mining power and manipulates the transactions).

But of course, it is almost impossible to create a 51% attack on the Bitcoin blockchain since there are too many participants in the network, and at this point, a single entity conspiring with over half of them to go rogue will be quite unrealistic.

This is the biggest advantage of Bitcoin. You can be rest assured that Bitcoin max supply will always be at 21 million and you can also be rest assured that transactions on its blockchain (that have been confirmed by multiple miners) are legit as well.

The decentralization factor makes sure that there is no manipulation involved since multiple participants confirm the same thing. And despite a few shortcomings, decentralized blockchain system is often seen as a superior mechanism in centralization vs. decentralization debate.

All these things contribute to the narrative that Bitcoin will become a more valuable store of value than even gold itself.

Another super important factor in understanding Bitcoin is its status as the godfather of cryptocurrencies. While Bitcoin’s utility is very limited at making transactions and as a store of value, it benefits from all kinds of developments happening in the crypto and blockchain space.

Newer cryptocurrencies can build smart contracts and various kinds of applications which are pretty cool, but at the same time, they are always seen as alternative coins (or altcoins) by traders and speculators. Bitcoin, on the other hand, is always perceived as the number one crypto or the godfather of the cryptocurrency world.

What does it mean? It means that when more cryptocurrency applications and projects are implemented for real-world use cases, Bitcoin valuation will still directly benefit from it. Last year we had plenty of web3 applications and blockchain games that went viral during the peak of the bull market.

Bitcoin itself did go up since people speculate that cryptocurrencies would keep growing and thus pushing Bitcoin adoption even more.

As long as Bitcoin remains the strongest and most iconic cryptocurrency out there, any significant development in the crypto and blockchain space will always give more demand to the Bitcoin name. It will take a long time before any altcoin will be able to take its place.

At the end of the day, there are multiple factors that can determine Bitcoin valuation. The trust factor, the limited supply and decentralization factor, and its status as the godfather of cryptocurrencies. These three factors are the huge reasons why Bitcoin has remained the most valuable crypto since its creation. Whether this status will change or not, we do not know, but for now, these are the things that give value to Bitcoin.