Crypto Explained: Why Does Bitcoin Have Value?

Published July 21st, 2022 - 07:12 GMT
Why Does Bitcoin Have Value?
Everything in our life, from cooking our daily meals to printing money, is inextricably related to the cost of electricity. (Shutterstock)
Highlights
The unique characteristics of Bitcoin make it valuable in the eyes of those who own it.

Since its inception in the aftermath of the financial crisis of 2008/2009, Bitcoin has revolutionary changed the way people perceive money one block at a time. Nevertheless, one of the most difficult challenges for crypto newbies is wrapping their minds on how and why bitcoin (BTC) might have value, especially since it’s not backed by any real-world commodity. 

Indeed, the concept of a digital currency might be somewhat perplexing. To arrive at this, let’s first deconstruct the definition of money itself. 

What is Money?

Money is an agreeable medium of exchange that stores value that has a unit of account. The first forms of money in the early days of human civilization were once rocks, beads, salt, sugar, stones, copper, silver, and gold; all were natural resources that we could find in our immediate surroundings.

Crypto Explained: Why Does Bitcoin Have Value?

Everything in our life, from cooking our daily meals to printing money, is inextricably related to the cost of electricity. At the end of the day, it all comes down to a subjective assessment of how much energy is "worth” as the energy usage itself is subjective.

To come down to it, money is used to pay for either a service that consumed energy to do or goods that required energy to make.

Money is meaningless until it is spent and changed into another type of energy, such as food, a home, a car, or a new T-shirt - only then will it provide meaning. Money must be spent in order for energy to be effective. 

More than a hundred years ago, Henry Ford envisaged the born of an energy-based currency; i.e, Sound Money. On December 4, 1921, Henry Ford published an article in the New York Tribune about this idea he had that could change money as we know it.

The article's headline read, "Ford Would Replace Gold With Energy Currency and End Wars." The well-known founder of Ford Motor Company proposed that a currency be backed by energy in kilowatt-hours (kWh), similar to how energy is used to mine bitcoin.

In a capitalistic world, it is by far the most straightforward and equitable method for the actual world to verify something in the digital realm.

Proof of Work, or mining, is not a bug that Satoshi did by mistake, the mining process is meant to be a costly feature that allows the conversion of electricity into digital gold, rendering it very necessary and essential to Bitcoin, serving its intrinsic value from it.

Do Fiat Money Have Value? 

Our banknotes are no longer backed by gold or silver or any other assets. Because of fractional reserve banking, the money we have often exists only as digits on a screen. When we were young, our parents told us over and over that money doesn’t grow on trees.

Thanks to The Bretton Woods agreement, it can be printed any time as our ‘fiat’ currencies are no longer redeemable, and to make things worse governments and central banks such as the Federal Reserve can print new money and increase its supply wherever they feel there is a need to, exactly what the Federal Reserve bank did to mitigate the COVID hit. 

So, fiat money doesn’t have an intrinsic value, except the one that we give to it by accepting it. In the materialistic world, we’re living in, collective trust is not enough as we can see how easily this trust can break as witnessed by failed monetary policies in Lebanon.

The creator of bitcoin operating under the pseudonym, Satoshi Nakamoto, deployed The Times newspaper’s front page headline, which reads “Chancellor on brink of second bailout for banks”, in the Genesis Block in which he showed his uneasiness at placing trust in central banks, hinting at his motive for creating the first truly digital currency.

Bitcoin has The Features of A Currency

The unique characteristics of Bitcoin make it valuable in the eyes of those who own it. Notably, its limited, auditable supply is not monopolized by a government or other single organization.

Bitcoin is ultimately a medium of exchange that is widely considered a store of value as it is dubbed digital gold, BTC acts as a store of value similar to gold.

As a matter of fact, bitcoin does a better job at being gold than gold itself! When it comes to scarcity, bitcoin is the victor with a limited supply fixed at 21 million BTC.

Although its energy-intensive process is the most criticized feature of bitcoin. Satoshi designed Bitcoin’s consensus Proof of Work (PoW) to be expensive on purpose, as he considered energy to be the universe’s super basic commodity.

Proof of Work is the proof of burn or proof that energy was consumed to achieve the mining, validation, and securing of the network.


© 2000 - 2022 Al Bawaba (www.albawaba.com)

You may also like