Bitcoin is the most exciting development the economic world has seen in decades. Nothing has shaken up the core principles of finance quite like BTC and the crypto industry that it birthed. It has caused us to collectively question our preconceived and established ideas on what money is, and how value emerges from it. For this reason, people are constantly asking why is Bitcoin valuable? This question is not reserved exclusively for those without academic training in Economics– even some of those who work in finance are perplexed by the topic. So let’s break down what actually makes Bitcoin worth so much.
What is Bitcoin?
Bitcoin is a digital currency that runs on a decentralized network known as a blockchain. This means that it exists virtually, with there being no centralized computer or location where it is managed or minted. Rather, it is created, transacted with, and released into circulation through the use of cryptographic equations. For this reason, we call it a cryptocurrency. Its cryptographic functions act as a way of securing the asset, allowing it to work even without a figurehead or organization maintaining it.
Related Content: The Role of Bitcoin in the Economy
Why Is Bitcoin Valuable?
When we talk about Bitcoin’s value, we are typically asking two questions.
- Why does Bitcoin have any value whatsoever?
- Why is Bitcoin valued so highly?
These are deeply connected questions, but they also cover slightly different ground. Let’s begin by understanding why Bitcoin has any value at all, as it is a little harder to answer, but also very important for laying a foundation.
Money Without a Master
Bitcoin emerged from the bloodshed of the 2007-2009 economic crisis– a time when the world fell into a recession. This was primarily triggered by the banking and finance sector, coupled with regulators performing a poor job of overseeing reckless activities. As a result, people became extremely distrustful of these centralized and custodial systems.
Bitcoin became a panacea for this turmoil. It promised a form of money that was not controlled by any company, not minted by any nation, and could be electronically stored and sent without the need for any third parties or intermediaries. It offered a type of financial freedom that the digital world had never seen before.
However, its value was tremendously low right out the box. When it first launched, Bitcoin was almost worthless. In fact, the first Bitcoin sale ever made (back in October 2009) placed 1 BTC at $0.0009. It’s important to point this out because we are not yet trying to discover why Bitcoin’s value is so high, but rather why it ever had value in the first place.
The reason Bitcoin was able to reach even this low number was because of its principles and architecture. Bitcoin offered an alternative to the status quo– to the institutions that had failed the public. There was an appetite for change. In this sense, the birth of Bitcoin’s value is found in this ideological merit, made stronger by the fact that computer scientists and mathematicians had begun assessing the network and deeming it to be robust.
This is Bitcoin’s intrinsic value. The fact that it provides a way of handling money digitally without any centralized force controlling it, and without the need for additional parties to get involved, is the concept that imbues it with meaning. Now, let’s not get confused here– intrinsic value does not always evolve into tangible worth (i.e extrinsic value).
Bitcoin had this intrinsic element within it from the moment its genesis block was made. The only reason that it ever started to be worth something on the market was because people recognized its value and began assigning monetary worth to it. But without its ideological significance, and perhaps without the backdrop of the global economic crisis, it would not have taken off.
Why is Bitcoin Valued So Highly?
Now that we have an understanding of why Bitcoin is valuable in some capacity, let’s understand why it has reached such dizzying highs. This is a discussion less about intrinsic value and more about extrinsic value (as in its value existing on the market).
Uniquely Limited Supply
Whenever something has a high value, scarcity usually plays a role. This is especially true when it comes to precious metals and bluechip artworks. And it is also the case with Bitcoin. There is a fixed supply of BTC, set to 21 million coins, however not all of those are in circulation. Coins get circulated when they are mined, meaning that computers are set to solve cryptographic equations, and when solutions are found, the people running those machines receive newly released Bitcoins.
This function adds a level of scarcity to the asset that typical money does not have. No new Bitcoins can be made, they can only be mined. This means that there will only ever be a maximum of 21 million BTC. If you consider the fact that many people lose their Bitcoin wallet details, and that some people accidentally send Bitcoins to non-existent addresses, then it is reasonable to even say that over time the amount of BTC in circulation will decrease.
We can actively see how Bitcoin’s scarcity affects its price by tracking what happens during halvings. These are special milestones where the reward for Bitcoin miners is slashed in half, reducing the amount of BTC getting circulated. Whenever this occurs, Bitcoin’s price tends to spike. The most recent halving in 2024 had a slightly different effect, where it did not cause an immediate uptick in value– but this could be because people priced in the suspected increase a little before the halving actually occurred.
First Mover Advantage
Bitcoin is the most well-known cryptocurrency on the market. This is, in part, because it has first-mover advantage– a concept that states that the first project to achieve something significant will have an advantage from a marketing perspective, as we value those who act first very highly, and because they will have more time to lay a foundation.
For many people, Bitcoin is synonymous with the entire crypto market, regardless of whether newer assets have more utilities or function in a more contemporary way. It is a definitive leader of the industry, rivaled perhaps only by Ethereum, which does not hold nearly as much prestige or realized economic value.
Media Representation
The media has an intimate relationship with Bitcoin. Once BTC gained recognition, the traditional media (i.e. newspapers, news sites, etc.) reacted negatively to it, shunning its existence. However, this might not have hurt its reputation as much as intended. If anything, the media helped promote Bitcoin to those who knew nothing about it. The unfavorable press even played into Bitcoin’s ideological message, where it acted as a critique of the current centralized world.
Over time, Bitcoin grew in value, and while it took traditional media a while to catch on to its transformative existence, social media embraced it with open arms. Platforms like Twitter and Reddit propelled Bitcoin and taught people how to make use of it. This helped it to build a global userbase.
Unimpeachable Reputation
Bitcoin has never been successfully hacked, and has never experienced any downtime. Considering it is the grandfather of the crypto space, this is a huge achievement. It shows just how robust and reliable Bitcoin is, leading it to act as a benchmark for how an ideal cryptocurrency should function. It sets a powerful precedent that other assets work hard to match.
What Affects Bitcoin’s Value?
Bitcoin’s value is constantly fluctuating. Let’s take a look at why this is, and what its triggers often are. This is, however, a nonexhaustive list, as countless elements can affect Bitcoin’s value.
Regulatory Concerns
When highly influential regulators, such as those based in the US, the EU, or China reveal new opinions about Bitcoin, its price sometimes shifts. For example, when China banned crypto, the markets reacted negatively, but when the SEC approved a Bitcoin ETF, the market reacted positively.
Opinions From Individuals
Only a select few individuals have the power to directly influence Bitcoin’s price. Usually, those who are associated heavily with traditional markets are not given this ability, which is why people like Warren Buffet have never successfully moved the needle on BTC despite his disdain for it. However, figures who are seen as more digitally aware and contemporary in their thinking are able to. This is why Elon Musk has been accused of affecting Bitcoin’s price in the past. Other individuals who are highly regarded in the space are capable of doing the same, but perhaps to differing degrees.
Global Economic Downturns
Bitcoin, and the crypto market as a whole, do not always operate with full parity compared to the rest of the financial world. For instance, there are many times when crypto seems unaffected by the stock market and forex downturns. This was especially the case several years ago, but more recently there has been some synchronicity. Nowadays, it is unsurprising to see Bitcoin drop in price around the same time as other traditional assets.
One possible reason is that in the current day, many traders (both retail and institutional) diversify their assets by investing in both Bitcoin and more old-school assets. Therefore, when issues arise in the traditional financial landscape, it echoes into the Bitcoin markets.
Bitcoin Versus Traditional Fiat Currencies
Bitcoin is valuable for many different reasons compared to fiat currencies. Let’s take a look at what some of them are.
Centralized vs Decentralized Control
Fiat currencies gain their initial value because they are created by an official organization associated with their origin country. This is usually referred to as a Mint. These are highly centralized, and almost always intertwined with various governments. The fact that a country or Mint anoints a fiat currency helps to give it value. That being said, it is not a guarantee of good value, as hyperinflation and other disasters can drag a fiat’s worth down. The major difference would be that these issues are often instigated by the centralized forces at play, rather than with Bitcoin, where fluctuations will be dictated more by investor-sentiment.
Legal Clarity
Many countries have slightly different rules for how Bitcoin can be used, and whether it is even legal to transact with. However, this issue does not really exist when it comes to fiat, as there are strongly defined rules for how foreign exchange should be handled. It is a much clearer experience, and this means that regulators are rarely going to have a major impact on their value. This is as opposed to Bitcoin, where regulators can be deeply influential.
Volatility Differences
Bitcoin is typically much more volatile than most fiat assets. There are countless reasons for this, often relating to the experimental nature of Bitcoin, the lack of historical data compared to fiat assets, and the higher amount of retail investors. But the most important thing to keep in mind is that there are more spikes in price for BTC than you’ll usually see in fiat. If you are extremely interested in BTC investments, but you are worried about volatility, it could be worth opening a Bitcoin savings account, so that you can offset some of the negative volatility with steady interest. This is why many people turn to Ledn’s Growth Accounts.
Conclusion
Understanding why Bitcoin is valuable is always an interesting topic. The fact that it is so different from traditional assets and currencies means that there is always a health level of debate around it. The ideas presented here are in many ways opinion-based, as there are multiple perspectives that exist when discussing this matter. It’s great to think about this for yourself and see what makes the most sense to you. This can even help you to discover what types of investments you would like to make, and whether you want to stay in the market for the long-run.
Disclaimer
This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.
