Here’s Why Does Bitcoin Have Value?

  • by

Seven hundred years before Sweden issued the first European banknotes in 1661, China cracked on how to lighten the load of people who wear copper coins everywhere. Such coins made life difficult: heavy and dangerous for travel. The merchants then agreed to deposit those coins with one another and issue paper certificates for the value of the coin.

Private issuances led to increased inflation and depreciation: the State eventually released its banknotes backed by gold reserves and was probably the world’s first legal offer to tender.

During the past few centuries, the Gold Standard started to be embraced by nations, which used materials such as gold and silver to produce coins of some weight. That was a certain amount of interest until the coin was manipulated and the representative money rose.

Banks gave’ gold certificates’-with a 50-denominator bill, you could exchange the bill for $50 of gold.

Then in 1944, Bretton Woods ‘ system decided to keep its currencies fixed on the US dollar since it was backed by gold reserves for the forty-four countries attending the meeting. The US dollar could be turned into gold at any time.

It meant that the US dollar could at any point be turned into gold.

https://i.imgur.com/uOvHVvR.png

This performed well, but not for a long time. The increasing public debt, currency inflation and negative balance of payments have meant that the US dollar has increased its pressure. Several European countries have even left the system to exchange their dollars for gold. By then, their stocks had more dollars than coins.

It changed in 1971 when former US President Richard Nixon shut down a gold window: the US was too expensive for foreign governments to operate on gold. In collaboration with fifteen other advisors, they announced a new economic plan to reduce inflation, lower unemployment, and turn the US dollar into fiat — largely based on currency users ‘ approval instead of goods and standards.

And you count on whether parties embrace pure faith-powered currencies.

The same can be said of Bitcoin, a cryptocurrency that once reached an all-time high of US$ 19,783.06. What is Bitcoin offering its value? It doesn’t seem to cover the whole picture to say that it is supply and demand: it is backed up by nothing, regulated by no one.

You could at least rely on the official governing bodies to preserve the value of the currency.

The problem with Fiat.

In reality, when you consider the big picture, any money controlled by a central bank is not sound. Governments typically have developed monetary systems that allow them to control the supply of their country’s money, ensuring their interest will always be worth something. The problem is that eventually “everything” became worth less and less since fiat money had been withdrawn from the gold standard.

The explanation for that is simple: governments like to spend more than taxes and other revenue streams, and so print enough money for their needs, through their control. When more money is printed and distributed in an economy, the value of each dollar already circulating decreases.

The beautifully designed features of Bitcoin mean that it is ready to have an impact on the lives of people in the most turbulent economies (such as Argentina and Venezuela) where the government manipulates the money heavily.

As a quick first move, countries like Venezuela and Argentina have been through periods where their governments have printed so much of their own money that their people could not spend it quickly enough before it was sold. This has been done in every country many times and as a result, their entire monetary systems have failed and affected people have had to find an alternative exchange mechanism.

People have the right to freedom as a human right, and governments who waste their wealth have probably taken away the economic freedom of their citizens. We have practically no access to the same economic opportunities as the rest of the world and therefore the biggest thing we want is a currency not dominated by a brutal central authority.

In 1912, in The Theory of Money and Credit, Ludwig von Mises, a renowned Austrian economist, wrote that “sound money” has two aspects. It allows the option of a widely used medium of exchange for the market. The government’s inclination to intervene with the currency system is negative, “he added,” It is impossible to understand the significance of the principle of sound money if you do not understand that it was created by governments as a tool to protect civil liberties from despotic infamy.

Bitcoin has been built with fiat features. Yet nobody’ owns’ Bitcoin, in the sense of governance. It also seems to work as fiat currency, but economists and finance experts think of the inherently different world. Who gives it its price?

Bitcoin was originally produced by Satoshi Nakamoto only a few thousand lines of code in 2008 before its release in early 2009. Nakamoto explained the Bitcoin idea in the popular Bitcoin paper: A Peer-to-Peer Electronic Cash System.

The original vision was to establish a kind of cash that was not required because of the cryptography of a financial institution.

The most significant breakthrough was the use of blockchain technology. That block is a transaction made in the Bitcoin network–the more blocks it contains, the longer it takes. It, therefore, forms a’ line,’ which gives it its name.

To make a block, the miners had to use crude power and electricity to verify that there is a transaction between A and B with X-value and Y-time. When authenticated, the block appears and the transaction passes. Bitcoin is distributed to the miner.

Nevertheless, there was no intrinsic value in this digital currency— it can not be used as a commodity. Bitcoin skeptics often argue that it must first be accepted and used for some other commodity purpose to make it viable. Over time, it will gradually become capital. For example, people stored gold for value because it was used in jewelry and electronics.

In one of the seminal works of Austrian economist Carl Menger he started to characterize money as “the idea that certain commodities are universally acceptable media for trade.” Economist Ludwig von Mises built on Menger’s work, assigning commodity cash to a kind of money that is “a commercial asset at the same time.” Fiat money is money which consists of “special legal qualifications.”

The concept of intrinsic value remains ingrained in humanity: Aristotle himself wrote that money should be intrinsically useful. Essentially, irrespective of the currency, its worth must be extracted from its utility itself. This claim breaks down when history shows that commodity value is not necessary to make something rich.

Glass beads were used for monetary purposes in Africa and parts of North America, although it proved to be of little use as a commodity. In the Pacific, the Yap people used calcareous coins as currency.

Bitcoin skeptics often use the logic of the intrinsic value to oppose the existence of bitcoin. Unfortunately, Bitcoin is a purely digital creation, so it is free of the physical world’s constraints. It does not have to be as precious as gold intrinsically and does not need to be given special rights by others to make this fiat currency. While it may seem like an excuse — bitcoin is a new entity free from our mortal laws— it still doesn’t make sense.

Think of it this way: the two different financial worlds are bitcoin and fiat.

https://i.imgur.com/aSyc76z.jpg

Fiat is part of the physical universe, adding many monetary constraints. Power goes to currency managers and the Central Bank can always print out additional banknotes to boost inflation and circulation. Nevertheless, nobody can tell you how many actual dollars float in the universe.

The supply of gold is limited, but this can be inflationary. If someone discovers a lot of gold outside the current supply, possession can be reduced dramatically. Material science advances can also reduce the need for the use of gold in electronics and consumer products.

The digital nature of Bitcoin calls for a new theoretical basis. Economists have long recognized precious metals and fiat constraints. Therefore, the launch of Bitcoin gave rise to a new set of rules that many considered an up-and-coming financial ecosystem.

The question is not only the fiat but also the blockchain environment, as bitcoin maximalists claim. With no interest as a political, investment or security instrument, bitcoin’s biggest bet is to become a global currency.

Today’s global supply of money (M1) is $7.6 trillion. When you include deposits of checks, short-term debt, time deposits, and other financial instruments, that is $90 trillion. Since Bitcoin’s market capitalization is only $130 billion at the time of its publication, at least the global money supply must be worth to be a global currency.

Nevertheless, that sovereign debt and foreign debt will lead investors to consider a reflation hedge that is more open and fungible than gold. This may drive the price of bitcoin as it has a utility as a value store. Many have simply held US dollars, EUR or JPY in their portfolios to combat inflation — the Argentineans and Venezuelans have done this with a relatively stable US dollar.

This can give it utility value: bitcoin can work as a value store.

Let’s look at it as an opportunity. If it is, so ultimately Bitcoin is disinflationary. To promote network growth, 50 new bitcoins were minted each time a new block was generated in the blockchain. After every 210,000 blocks, the reward is halved (on 14 May 2020, every block gives 12.5, which will be halved to 6.25). Together with the built-in scarcity of 21 million bitcoins, it is a little wonder why both citizens and financial institutions would consider bitcoin as a strong currency (albeit as a safe-haven currency).

This means that the integrated monetary policy drives the buying power of bitcoin, but what defines its price?

Looking at the classical business school, you might argue that the price of bitcoin is dictated by the cost of its output. That means power and machinery. When Bitcoin continues to be disinflation, the number of miners will gradually decrease as it becomes too expensive for me. However, there are still miners willing to lose, which could mean that there are people who are hanging back from the growth of Bitcoin again in the future: price does not depend solely on the cost of production, although this is a factor.

The neoclassical economics school has built on this principle and has added another aim: supply and demand. Because bitcoin supply is limited and the number of bitcoins that are mined can decrease over time, the demand for more bitcoins can increase. Increased competition is equivalent to higher prices.

It doesn’t appear that relying on only objective factors paints the full picture. If the cost of production is an important reason, Bitcoin should be slightly similar to the value of US money (M3).

Nonetheless, miners are at a disadvantage, even though it costs bitcoin more.

If the balance of demand and supply is essential, a transparent and audited supply limit from Bitcoin would decide a reasonable demand. Nonetheless, bitcoin appears to be prone to extreme uncertainty with the potential to crash and rocket on the same day.

Join the Austrian economics school, which Bitcoin supporters are very much in favor of. The Austrian economists believe that the price of anything, including the cost of production, is decided by subjective factors. Supply and demand shall be determined by common preferences. As such, it can clarify the appeal of Bitcoin — perspective interest and subjective considerations can be a greater player.

There is no clear explanation as to why cryptocurrency–or even money–has value. In this case, Bitcoin’s price appears to be driven by the combination of classic economic models, feelings and built-in monetary policy.

Regardless of the economic philosophy, you follow, however, cryptocurrencies are still poised for a financial revolution. If it can develop into a global money substitute, the global financial environment will be reversed (we don’t know for better or worse).

Bitcoin is essentially a launchpad for financial experiments. Using blockchain technology led the 2016–2017 cryptocurrency boom, resulting in a whole new world of blockchain developments. We are today looking at secure cryptocurrencies that can sustain a steady price of $1 through a combination of asset collection and reserve banking principles.

https://i.imgur.com/IRsTbTa.png

Instead of seeing bitcoin as a form of currency, consider it as a payment system.

Therefore, bitcoin’s true value lies in its network. The more participants, the better. In general, this means that the value of bitcoin depends on who owns it. Today, with Bitcoin adoption (not for everyday use, but investment and trade) and, this new technology is being used by increasingly curious people. It means that there is more distribution.

To function as it should, though, Bitcoin needs to get rid of the mining and mining pools by transitioning to a POS system. Bitcoin’s proof-of-work system makes transactions exceptionally costly— miners exhaust millions to check bitcoin transactions on the grid with coal and rough computer power. Bitcoin is valued for its network with the PoS system. Many stakeholders would allow a portion of their holdings to rise and thus increase their holdings proportionately.

It sounds simple, but most bitcoins are currently mined by Chinese miners. If, for example, it can substitute large sums of money in the US, what would give the government justification to accept a global currency that is dominated by the miners of a competing superpower?

Why would smaller nations follow if super-powers are unwilling? The global monetary target seems like a pipe dream, but essentially whether or not bitcoin can succeed depends on who you learn from it, just as from where it gets its value.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.