Why Does Bitcoin Have Value?

Bitcoin’s unique features make it valuable to adopters. Notably, its scarce, auditable supply is not controlled by a government or different entity.

Scarcity

Arguably the defining feature of Bitcoin differentiating it from other forms of currency is its mathematical scarcity. Unlike traditional fiat currencies with an unlimited supply that is adjusted at the whim of central banks and governments, Bitcoin’s creator Satoshi Nakamoto intentionally limited the lifetime supply of Bitcoin to 21 million coins through the algorithm built into the Bitcoin network. Bitcoin is the only asset in the universe that has a mathematical scarcity. Elements like gold are naturally scarce on Earth; however, there are trillions of dollars worth of gold floating around on asteroids in our solar system that may one day be accessible to humans, significantly inflating the gold supply.

Decentralization

Many Bitcoin advocates reference its decentralization as one of its strongest benefits. After creating Bitcoin and its blockchain, creator Satoshi Nakamoto stepped away from the entire project, placing Bitcoin into the hands of its users as a decentralized alternative to government currency. The decentralized nature of Bitcoin also eliminates the potential for a single point of failure, making it more resilient than traditional currencies. Bitcoin’s decentralized nature also makes its core features, like its finite supply, resistant to change. This protects Bitcoin from regulatory or corporate capture.

Auditability

The Bitcoin blockchain ledger provides a permanent record of all transactions, and the open-source accessibility of the ledger allows anyone to view and verify previous or ongoing transactions and addresses. The ability for anyone to self-audit bitcoin transactions is essential to fostering the decentralized nature of Bitcoin. Without this transparency, Bitcoin’s scarcity could be manipulated.

Monetary Policy vs. Government Currencies

Although the U.S. dollar is the most commonly adopted fiat currency in the world, it has many weaknesses that Bitcoin creator Satoshi Nakamoto sought to supplement. Unlike Bitcoin, the U.S. dollar is centralized and has an infinite supply. The Federal Reserve is the highest authority over currency production, distribution, and circulation amounts. The impact of Federal Reserve dollar production, often known as Quantitative Easing (QE), can increase inflation and impact the dollar’s value.

The negative impact of continuous U.S. dollar printing and the resulting inflation and devaluation is well documented throughout U.S. economic history: periods of rapid inflation and economic instability due to dollar-printing occurred after WWI and WWII, as well as the 1970’s. Bitcoin is fundamentally incapable of creating that type of economic instability because of its capped supply and the periodic reduction, and ultimate end, of its supply. Unlike the Federal Reserve, Bitcoin maintains an enduring, immutable monetary policy. The security of Bitcoin’s value over time is a major reason why more and more investors are choosing to hold bitcoin as their preferred long-term method for storing wealth, in many cases even preferring it to gold. Bitcoin has been referred to as “digital gold” because it has similar characteristics of scarcity and value preservation, in addition to the added benefits of portability and divisibility.

Portability

Because Bitcoin is a digital currency, it is highly portable and easy to transact. Individuals can store on any personal device or flash drive, and send and receive Bitcoin almost instantly, without outrageous fees or intermediaries.

Divisibility

Like traditional monetary assets, Bitcoin is divisible. Bitcoin is more divisible than most currencies: a single bitcoin can be broken down into satoshis, which are equal to one hundred-millionth of a bitcoin (1 satoshi = 0.00000001 BTC). As a result, each bitcoin can be broken down into 100,000,000 satoshis. Therefore, one can buy a small fraction of a bitcoin to get started.

In conclusion, among other traits, Bitcoin has value given its scarcity and auditability. It is sovereign hard money. Not controlled by a single entity, Bitcoin is decentralized and is growing into a stable medium of exchange as adoption accelerates.

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