Others who understand the Bitcoin system agree it is valuable. In this theory, commercial banks create money (and value for currencies) by lending to borrowers, who use the money to purchase goods and cause currency to circulate in an economy. Many governments and societies have found that fiat currency is the most durable and least susceptible to loss of value over time. Because Bitcoins are virtual, only existing within computer networks, some people have a hard time grasping that Bitcoins are scarce and that they have a cost of production. As a result, the market price at any given time may vary wildly from its fair or intrinsic value. Any discussion about the value of Bitcoin must address the nature of the currency. In recent years, hacks, thefts, and fraud have plagued digital currency. Both are limited in quantity and have select use cases. But Bitcoin often fails the utility test because people rarely use it for retail transactions.
Bitcoin’s network is decentralized, and the cryptocurrency is not used much in retail transactions. Throughout much of its history, speculative interest has been the primary driver of Bitcoin’s value. Because of this unwillingness to accept that digital traces can hold value in this way, they remain convinced that Bitcoins are worthless. Currencies have value because they can function as a store of value and a unit of exchange. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis. The only way that one would be able to create a counterfeit Bitcoin would be by executing what is known as a double-spend. If the price of one bitcoin were to reach $514,000, Bitcoin’s market capitalization would reach approximately 15% of the global currency market. Assuming this total remains stable if Bitcoin were to achieve 15% of this valuation, its market capitalization in today’s money would be approximately $3 trillion. Roughly speaking, the money supply (M1) in the U.S.
Like any asset or thing of value, the price that people are willing to pay for Bitcoins is a socially agreed upon level that is also based on supply and demand. As the supply diminishes, demand for cryptocurrency has increased. The value of fiat currencies is a function of their demand and supply. If Bitcoin does not achieve success as a medium of exchange, it will not be useful as a store of value. Some countries, like El Salvador, are betting that Bitcoin’s technology will evolve sufficiently to become a medium for daily transactions. Difficulties surrounding cryptocurrency storage and exchange spaces also challenge Bitcoin’s utility and transferability. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. Bitcoin is much more divisible than fiat currencies. Cryptocurrency does display some attributes of a fiat currency system, however. These qualities allow a currency to find widespread use in an economy.
Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that others will accept that currency. Bitcoin does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. Bitcoin’s underlying technology, called blockchain, is tested and used as a payment system. The argument for Bitcoin’s value is similar to that of gold-a commodity that shares characteristics with cryptocurrency. If Bitcoin’s price continues to rise over time, users with a tiny fraction of a Bitcoin will still be able to make transactions with the cryptocurrency. With all 21 million bitcoins in circulation, that would put the price of 1 bitcoin at roughly $143,000. This is because relatively few transactions are conducted in Bitcoins and very few things are denominated in Bitcoins. Are Bitcoins Fairly Valued? There are six key attributes to a useful currency: scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). Today, most major global currencies are fiat. In the modern age, government-issued currencies often take the form of paper money, which does not have the same intrinsic scarcity as precious metals. I have had so many compliments about my party and I know that a lot of friends will be using Micky for an eventful party.
