You might have heard some powerful people like Warren Buffett and Donald Trump express their opinions that Bitcoin has no value. This is a difficult concept to argue as the first cryptocurrency displays a market capitalization of over $200 billion. So what is behind Bitcoin’s value? Let’s throw back the curtains and take a look.
Bitcoin’s Biggest Misconception
The biggest misconception about Bitcoin is that it holds no value. As the cryptocurrency is not backed by reserves, how can the digital currency hold any solid form of value? Strap yourselves in, we’re about to tell you. It’s also worth noting that the cryptocurrency is ranked number 6 on the list of largest currencies in circulation.
How Fiat Is Backed
According to the Gold Standard, countries needed to keep an equal amount of gold in reserves to their circulating currency in order to maintain its value. This concept was abandoned in the mid 20th century, but used to be a way for the country to maintain their exchange rate. After this system was abandoned, governments were able to print money as and when their economy needed it. Fiat currencies’ value is now determined by supply and demand as well as the political structures behind them. Taxes also contribute to the fiat value, as it is mandatory for everyone to pay taxes and they are paid in fiat.
Fiat value is also fueled by its purchasing power, as everyone knows and expects that they can use fiat to purchase goods and services, this increases the confidence in it’s longevity, and therefore its value. Unfortunately, fiat currencies are however prone to inflation. In some countries like Venezuela and Zimbabwe, the inflation increased to such great levels that the entire economies collapsed. At one stage, Bitcoin’s value was more stable than the Venzuelan bolivar.
What Is Behind Bitcoin’s Value?
Similar to fiat currencies, Bitcoin’s value is not backed by a single commodity. However, just because Bitcoin isn’t backed by a commodity or a centralized authority, does not mean that it does not hold any value. Instead the cryptocurrency functions off of a supply and demand system. Yes, Bitcoin has built a $200 billion market capitalization off of supply and demand (and a few other things). Not only that, the single financial innovation created an industry that is now worth $351 billion.
Two of the biggest factors behind Bitcoin’s value is its complicated mathematical construction and its a limited supply. The blockchain technology behind it and the fact that there will only ever be 21 million Bitcoin is the reason why the cryptocurrency has soared in value over the past 10 years of existence. With a limited supply, the deflationary cryptocurrency will only increase with value over time, unlike its fiat counterparts.
The technology behind it and the innovation factor are two other things to consider. Bitcoin was the first currency to operate outside of the control of a single organisation with no reserves backing it. The currency has built an entirely new monetary system through community-run networks as opposed to a single entity driving it. Bitcoin also allows a level of financial freedom that fiat currencies can’t, equally empowering the unbanked and banked populations around the world.
Bitcoin Is Here To Stay
Whether you want to believe in what is behind Bitcoin’s value or understand the Bitcoin price history, there is no denying that the cryptocurrency is here to stay. While the markets may be considered volatile, they are less susceptible to fluctuations due to fiat currencies and are largely considered to be strong hedge fund options. During the pandemic that saw hundreds of economies hit dire lows, Bitcoin functioned with a relative level of calm, increasing in value as more traditional investors moved their funds to the “safe haven” asset.