What is a currency without value? That is why when you invest in Bitcoins you are doing so because Bitcoin has value. Bitcoins provide us with an efficient and secure medium for transferring funds online. It is a decentralized digital payment system that works according to a set of transparent rules and can be an excellent alternative to traditional fiat currencies controlled by banks and governments.
How do the Bitcoins have value?
A currency can be used only when it is storage of value or it can be depended upon to sustain a relative value over the years. In short, it should not depreciate. Earlier, precious metals and specific commodities had been used for payment of goods as these items were found to have a stable value that did not fluctuate. Soon these gave way to paper money issued by governments. Besides being storage of value, any currency must have some key features like utility, divisibility, transportability, counterfeitability, and durability. Does the Bitcoin satisfy these criteria?
- To begin with, supply of a currency has a crucial role to play in maintaining its value. When money supply is excessive, price of goods may rise and the economy may crash. In fiat currencies, governments will print money so as to control scarcity. For Bitcoins there is a finite supply of 21 million Bitcoins and the final Bitcoin is likely to be mined in 2140. Scarcity will drive the value higher as is seen with commodities like gold.
- Any successful currency can be fragmented into small incremental units. So a currency must be divisible to reflect the values of every service or product available in the economy. Luckily for the Bitcoin, it can be divided up to eight decimal points, each of which is called a Satoshi. This ensures that there are quadrillions of units or Satoshis that can be distributed throughout the global economy.
- A currency should have utility and individuals should be able to trade units reliably. This is the main idea behind a currency; to offer an alternative to the barter system of exchange. The Bitcoin uses blockchain technology which is a shared ledger system that is trustless. This means no parties have to establish trust in each other to make this system run. Rather, there is a system of checks in place for running the blockchain smoothly.
- Currencies must be transportable so that it can be transferred seamlessly between parties across borders. Because of wallets and exchanges, transferring Bitcoins between parties is easily done in a matter of minutes. It however demands a lot of computing power for Bitcoins to be mined and transactions to be verified by miners.
- Any currency must have durability because notes or coins that can be damaged and destroyed easily will become unusable. Any digital currency cannot be physically harmed and this makes Bitcoin very valuable. It does not exist in a physical form but it is possible to lose your Bitcoins if you lose the private keys to your wallet. But Bitcoins themselves cannot be destroyed and they will remain in the blockchain.
- A currency must be hard to counterfeit; else it becomes useless. Malicious parties will disrupt it at any time using fake bills and this is bound to affect the currency’s value negatively. Because of the blockchain’s nature, this cannot happen with Bitcoins. Records once entered on the blockchain can never be erased or tampered with making it rather difficult to counterfeit Bitcoins.