How Does Bitcoin have Value?

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The price of Bitcoin is always swinging high and low. In December 2017, we witnessed an all-time high of close to US$20,000 per Bitcoin, and a market capitalization of slightly over US$300 billion.   

Then the market went bearish in the following months as the crypto winter set in. The price rolled down, and it reached slightly above US$3,000 in December 2018. The market capitalization bled to under US$100 billion.

Right now we seem to be on the edge of another rally that could take us to new all-time highs in price and market capitalization.

The cycle of low and high has become part of Bitcoin. However, the general trend is the increase in its value.

But even with this volatility, how exactly does Bitcoin have value?

Is it the energy it consumes?

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value. Ironically, many in this school of thought hold the view that fiat currencies like the dollar have some intrinsic value. And that it comes from the backing by the state through central banking.

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value.

In response, Bitcoin enthusiasts have explained that the value of a bitcoin comes from the amount of energy the Bitcoin network consumes to mine it. According to a study by Crescent Electric Supply Company, a US-based electric hardware supplier, it costs US$4,675 to mine a bitcoin in the US. In China, the cost is US$3,172, South Korea $26,170 and Venezuela$531. The variation is brought about by how much electricity costs in different countries.

This explanation of how Bitcoin gets its value has its shortcomings. First, it is hard to reconcile the different costs of mining in different countries. Secondly, it means any amount on the price of Bitcoin above the cost of mining can never be justified.  

The question of what constitutes value is one that economists have sought to answer for decades.

Renowned economist has a better theory

Carl Menger was a professor of political economy at the University of Vienna in the late 19th century and he is regarded as the founder of the Austrian School of economics. In his book Principles of Economics, he explains that what constitutes the value of an item is its utility.

He states that ‘value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

‘Value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

In other words, value is the usefulness of something in satisfying our needs. This way of looking at value can be a great foundation in understanding the value of Bitcoin. The value of Bitcoin comes from its usefulness as a digital ledger that is immutable, tamperproof and decentralized.

Bitcoins also have value because of its usefulness as money that is durable, portable, fungible, scarce, divisible, and recognizable. Most importantly, Bitcoin is valuable because it is a less costly, fast and reliable mode of payment across international borders.

This usefulness of Bitcoin in meeting our needs translates to the demand of its units at the marketplace and corresponding prices. If there are more people finding it useful its price will keep going up. The value is further increased by the fact that Bitcoin is a deflationary currency; there will only be 21 million bitcoins.

The Bitcoin protocol is set in such a way that about every ten minutes new bitcoins come into circulation. However, the rate halves every four years so that around the year 2140 the release of new bitcoins will stop. By then all bitcoins ever mined will total 21 million.

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