A bitcoin has value because it can be exchanged for and used in place of fiat currency, but it maintains a high exchange rate primarily because it is in demand by investors interested in the possibility of returns.
Of course, many other factors influence Bitcoin's value. Read on to learn more about why Bitcoin has value.
Key Takeaways
- Bitcoin has value because it can function as a store of value and a unit of exchange. It also demonstrates six key attributes that enable its use in an economy.
- The definition of value in a currency has changed over centuries from physical attributes to the velocity of its use in an economy.
- Bitcoin demonstrates the attributes of a currency, but its primary source of value lies in its restricted supply and increasing demand.
Why Traditional Currencies Have Value
Throughout history, many items have been used to exchange value—such as shells, beads, animal skins, and precious metals. In this respect, these items are regarded as "money." Money doesn't have to be the printed currency we are all familiar with—all it needs is to act as a store of value, be recognizable as a unit of account, and be accepted as a medium of exchange.
So, if an item meets those criteria, it is money. However, to be successful and long-lasting, it must have:
- Scarcity: It must not be a widely available resource
- Divisibility: Currency should have many denominations
- Acceptability: The intended audience must accept it
- Portability: It must be able to be carried around and exchanged
- Durability: Currency should have a long life span time
- Uniformity: All denominations should be identical and not easily reproduced
Value is then assigned by the users based on its supply, demand for the currency, how much it is worth to them, and how much of a given good or service it can purchase.
The image below compares many different value attributes of gold, fiat, and crypto.
:max_bytes(150000):strip_icc()/dotdash_Final_Why_Do_Bitcoins_Have_Value_Apr_2020-01-f01e40e5ec7642d782ffddca3614bb20.jpg "Why Do Bitcoins Have Value? (1)")
Why Does Bitcoin Have Value?
Cryptocurrency displays the same attributes a fiat currency system does. Here's how it meets them:
- Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
- Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis.
- Acceptability: More and more people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them because their financial systems are failing them. Businesses are accepting them in greater numbers, and more consumers are using them.
- Portability: Bitcoin can be used across borders, allowing any consumer with an internet connection to participate in the global economy and access financial services.
- Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
- Uniformity: Bitcoins cannot be counterfeited and don't have a physical appearance, although there are renditions of coins that represent Bitcoin.
As Bitcoin has also become accepted as a medium of exchange, stores value, and is recognized as a unit of account, it is considered money.
Two of the most influential factors behind Bitcoin's price volatility are greed and the fear of missing out on large returns. Greed is generally considered a negative trait, but in these modern (and expensive) times, it is natural for people to want more money. In fact, society and the businesses operating within it even encourage the desire for more.
But its exchange rate, the value most often associated with the coin, isn't so much a factor of the people who use bitcoins in transactions; it's investors buying the cryptocurrency hoping for profits and traders buying and selling it to make money on price movements.
Because it is in demand by investors (realistically, they are speculators because they are hoping for returns), Bitcoin commands a very high price, as demonstrated by the exchange rates it has experienced in the past. At one point, 1 BTC was valued at less than $1—more than one decade later, that same bitcoin would have been worth more than $75,000. Prices have varied wildly since Bitcoin was introduced, but this volatility has many hoping that the market will continue to feed an increasing value.
Why Is Bitcoin So Precious?
Like any asset or thing of value, the price people are willing to pay for bitcoins is a socially agreed-upon level based on supply and demand. As long as Bitcoin is highly valued by some, it will maintain its demand.
What Is the Point of Bitcoin?
Bitcoin's original design was to be a replacement for traditional money systems and take control of money away from centralized governments and third-parties.
What Drives the Price of Bitcoin?
Bitcoin's price is primarily driven by supply, demand, fear, and greed. Some people argue that its price is correlated to its cost of production, its utility as a store of value, or its intrinsic value—but if these were true, it would not be as volatile and reactive as it is.
The Bottom Line
Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
