Bitcoin has become a household name. While only two percent of Americans own Bitcoin, almost everyone has heard the term tossed around in the news and economic reports.
However, despite its reputation, many people still do not understand how Bitcoin works or what gives it value. Though most people agree that Bitcoin is worth money, they do not know why.
Why Bitcoin Has Value
Bitcoin’s value is that it is useful as money. Like any form of currency, a population must agree that a form of money has worth and can be exchanged. After Bitcoin began to be traded regularly between people, it became a legitimate currency.
Most experts define money as something that meets the following criteria:
- It stores value, meaning it can be used as currency for as long as the money exists.
- It acts as a unit of account, essentially a measurement of something’s value.
- It is a medium of exchange or a method of payment.
The difference between Bitcoin and other currencies is that most modern money is based on the currency’s physical properties, like gold or silver, or trust in central authorities, like the American dollar. Bitcoin, however, is based on mathematics.
The most significant sign that a population has accepted a currency is when users, merchants, and startups begin to trust and adopt it in large numbers. For that to happen, money has to have six characteristics.
The Characteristics of Money
- Durability: As a digital currency, Bitcoin is not affected by the elements or wear and tear. While it is reliant on a digital landscape to exist, its form is indestructible within that environment.
- Portability: Another feature of Bitcoin’s digital nature is that it can be accessed from anywhere as long as someone has access to the internet. With the popularity of smartphones, Bitcoin can travel everywhere with its user.
- Divisibility: Currency must be able to be divided or combined into different units. For example, the American dollar can be combined with four other dollars to become a five-dollar bill. Bitcoin can be divided and combined into different unit amounts.
- Uniformity: A currency is not worth much if every unit is valued at a different amount. Because every Bitcoin is worth the same amount, users can trust in its value as currency.
- Scarcity: Only a limited supply of Bitcoin has been created. As new Bitcoin is made, it follows a predictable and decreasing rate to ensure that the Bitcoin market is not overly inflated.
- Acceptability: The most important characteristic of a currency is its acceptance as money by a population. After Bitcoin started to be traded for other currencies and products, more and more people began to value it as a legitimate currency.
How the Price of Bitcoin is Determined
Bitcoin’s value is determined the same way as other currencies’ value: through supply and demand. As demand increases, the price of Bitcoin increases. If demand falls, the price falls as well.
Prices are volatile in Bitcoin’s small market. Relatively minor amounts can drastically change the market price, raising or lowering it by a significant amount.
Because Bitcoin has become more and more popular in the last few years, gaining recognition as an incredibly valuable asset, more and more people have invested. The more people that invest, the higher the value of Bitcoin becomes.
The first time that Bitcoin was used as a currency was in 2010. A user traded 10,000 Bitcoin, now worth $348,270,000, for two pizzas. Earlier this year, Bitcoin prices hit an all-time high of over $40,000, and it has continued to stay strong ever since.
As the general population started to trust Bitcoin as a legitimate currency and view it as valuable, it became a valuable and legitimate currency. Now, it is widely regarded as the innovative cryptocurrency the introduced the public to cryptocurrency as a concept.
Bitcoin is an incredibly valuable currency whose worth comes from its acceptance, use, and qualification as money. It has the six characteristics of a legitimate currency and is widely accepted and trusted by most people as money.
Bitcoin’s value is also determined by the same standards and methods as other currencies. The things that make Bitcoin unique are not how or why it is valued, but rather its innovative, digital nature and its widespread popularity.
As the first cryptocurrency the world became familiar with, Bitcoin has retained its fame and value. While there have been minor decreases here and there, since its first use as currency in 2010, Bitcoin has become an incredibly high-value asset.