Where does Bitcoin's value come from?

Author's note: This article is part of an ongoing blog about my adventures in the world of alternate currencies.

Where does Bitcoin get its value anyway? Apparently the answer to that question isn't obvious. Some people, like the author of this article from CoinDesk,1) really don't have a clue. To be honest, I'm not an expert and am pretty clueless about it myself. But I do have a few reasonable guesses as to what makes Bitcoin valuable. One Bitcoin currently trades for $844.10 on Camp BX.2)

The number is limited

In a world of fiat currency which central banks can for all practical purposes print up whenever they want to any sort of currency that cannot be created at will is going to grow in value relative to one which can. When the Bitcoin protocol was first written, the final number of Bitcoins that would be mined was set at 21 million. There will never be more than 21 million Bitcoins in circulation. It's not going to be until sometime in the mid 22nd century that all 21 million Bitcoins will begin to be available. Not only that, because it's a cryptocurrency, anytime someone loses their wallet encryption key or makes a copy/paste error and sends some to a nonexistent address, those Bitcoins are lost and no longer in circulation. So while theoretically there will one day be as many as 21 million Bitcoins in circulation, in practice there are and will be significantly less than that.

In contrast, the Federal Reserve of the United States creates money at will, and according to this article,3) this creation averages out to four billion US dollars a day. This makes Bitcoin downright rare. Rare things tend to be highly valued. Bitcoin's scarcity relative to US Dollars contributes to it being worth more and more US Dollars over time.

The pace of creation is predictable

Right now, and for the next hundred or so years, Bitcoins are still being created. This takes place through a process known as mining or generating. When Bitcoin first began, miners could generate 50 BTC per block, or every ten minutes. Now miners generate 25 BTC per block or every ten minutes. There will come a point in which the amount generated drops to 12.5 and then halves again, and this halving may actually be infinite. But all this has been planned out ahead of time and is written right into the Bitcoin protocol. No one is going to wake up one day and find out that some central bank created 500,000 BTC in one instant and dumped it on the market. If the Federal Reserve or any other country's central bank wishes to get in on Bitcoin creation, it can either buy and maintain physical hardware or it can open up an account on CEX and buy GHS to engage in cloud mining. But no matter how much hashing power it obtains, it will not be able to create any more than 25 Bitcoins every ten minutes. Even if it bought tons and tons of hashing power and was able to increase the block generation rate, that would only last for a couple weeks until the mining difficulty increased to bring block generation rate back down to one every ten minutes.

Ordinary people can get involved in Bitcoin creation

In the world of fiat currency, ordinary people are not allowed to “create” money. They can only write checks for amounts of fiat they actually own, and once they do they no longer own it. Only banks can loan money they do not actually have, and even so, most of that power goes to the central banks. This means that an elite few people get to create money while the rest of us have to work for it.

But if you want to be involved in Bitcoin creation, all you need is a computer. And actually, you can even pull it off without owning your own computer. Bitcoin used to favor computer geeks and programmers because they were the only ones who knew about it, and they would use their computers to run the mining script and generate Bitcoins all day. Today's major Bitcoin owners most likely got their start by mining.

Today, anyone can get a cloud mining account, buy some hashing power, and get started on mining. You can buy a very small amount of hashing power and generate a very small amount of Bitcoin, or you can invest more heavily to generate more. You are free to withdraw your earnings to your own wallet and do whatever you want with them. You can even sell off your hashing power at any time. There is no longer any barrier to an ordinary person with a basic understanding of the Internet participating in Bitcoin creation. Bitcoin is no longer a private playground for computer nerds and coders.

Bitcoin is easy to acquire in other ways

Not everyone is going to get involved in mining Bitcoin. They can still get into Bitcoin quite easily. The easiest way to get some Bitcoin is to simply go to an exchange like Camp BX and buy some using fiat money. It's easy but at today's prices, not cheap.

There are other ways to acquire Bitcoin, including various earning sites such as CoinAd, BitVisitor, and CoinTasker. There are also plenty of faucet sites which will dispense miniscule amounts of Bitcoin.

By far the easiest and most lucrative way to earn a significant amount of Bitcoin is to take the less direct route, and earn Devcoins by writing for the Devtome. Devcoins can then be traded for Bitcoin on Vircurex, although many have found Devcoins themselves to be a good crypto to hold. Although writing requirements have grown a bit more strict since the Devtome project began, it is still open to anyone who wants to apply, and writers are still free to write about whichever topics most interest them. Blog posts such as this one are welcome. The bottom line is that an ordinary person who can write can get into Bitcoin with an investment of nothing but time. The Devcoin project also provides bounties for completing various projects so even people who do not write but have other skills can get in on the opportunity.

The Bitcoin community is generally a small and friendly place (though there are exceptions), and there is a lot of creative foment. The Bitcoin Forum is often the place where new businesses get launched or where likeminded people connect with each other to collaborate on an interesting and profitable business ventures. Many of these entrepreneurs need help and are more than willing to pay for it in Bitcoin. If you have a skill such as writing, programming, marketing, web development, graphic design and more, it very well may take nothing more to land a few loyal clients than to simply approach them with a friendly message explaining how you and your skill set can help move their venture forward. I recently landed an awesome writing client with a single email.

Bitcoin is anonymous

This is true for the most part, though not always 100% the case. But people who transact in Bitcoin generally believe that their transactions are untraceable. Bitcoin is the currency of choice for any kind of businesses which operate outside of the realm of legality. These include those underground Tor sites which sell mostly drugs, gambling, and all kinds of black market ventures I don't even want to think about. The reason this is important is that despite many people's opinions and hopes to the contrary, the black market is big business, and that by itself creates demand, and therefore value for its chosen medium of exchange.

In addition to the black market, people who live within the law but who generally value their privacy are getting into Bitcoin. With recent news of how the NSA harvests all sorts of information about your emails and other online activities, people are finding ways to make some of those activities less easy for spies to monitor. These people are finding that Bitcoin is a great medium for at least some of those financial activities.

Bitcoin has safe haven potential

Because of its volatility, Bitcoin isn't exactly the most highly recommended safe haven out there. However, when a country's heavily indebted government decides it's going to try to balance its books by confiscating ten percent of its citizens' bank account funds, Bitcoin suddenly looks really good. Informed citizens who act quickly enough can choose to use their savings to buy Bitcoin to protect their wealth from being confiscated. When enough people buy Bitcoin for this reason, the price goes up. This can also apply to any other situation where citizens for whatever reason wish to either move their wealth out of the country (Bitcoin has no borders) or get it out of their government's line of sight.

Bitcoin is easy to work with

This cannot be overstated. Transactions are easy, seamless (unless you are dealing with CoinBase), and they cost next to nothing. When there are intermediaries, such as payment gateways for retail sites, those intermediaries charge a small commission, significantly less than what the major fiat payment gateways charge. There are a number of online wallet providers so people don't even need any special software to own Bitcoin, though an encrypted wallet hosted on a personal computer is highly recommended. The PC wallet client is easy to install and use. Online retailers can easily accept Bitcoin for their product and more and more are.

Bitcoin absorbs some of the excess fiat

This is a working personal theory of mine. Going back to how Bitcoin total amount and ongoing creation are limited, it forms an additional rare resource for people to sink fiat money into. Since fiat money is inflationary, there is a steady trend of ever increasing amounts of money chasing fewer and fewer goods. This results in prices steadily (and in some cases not so steadily) increasing. We all know about gold, silver and copper. We've mostly heard of collectibles such as original pieces of art by the well known greats or limited edition merchandise (Beany babies comes to mind). Bitcoin in one sense is another limited edition piece of collectible merchandise–something to sink excess fiat currency into.

This means that while the super rich who have fiat money to burn may “invest” some of it into Bitcoin (and I'm reading more and more articles indicating that some sectors of Wall Street are beginning to do just that), those of us who have found a way to acquire Bitcoin without spending our hard earned dollars on it get some of that wealth redistributed to us each and every time we sell a Bitcoin. Bitcoin's value in terms of fiat currency really has no particular limit on how high it can grow, but if that weren't enough, there are numerous alternative cryptocurrencies that have also attracted buyers and their money. Who knows? Bitcoin could very well turn out to be what facilitates one of the biggest wealth transfers in history. In any case, anything which can absorb some of those excess fiat units is doing its part to stave off a major currency crisis involving hyperinflation.

Today with Bitcoin worth less than $1000 apiece, this may not yet be significant, but if the value grows to $10,000, $100,000 or even a million apiece, that could slow down inflation by a few seconds at least. It could also make it real nice for someone who happens to have a Bitcoin or two lying around.

Mainstream investors are buying

Yes, a small trickle of regular investors, hedge fund managers and other type of Wall Street insiders are taking a serious look at Bitcoin as an investment.4) Some have already obtained positions. These investors are dabbling into it now. If they ever decide to seriously jump in, they will draw in the funds of all the people whose investments they manage. I believe the fact that they are thinking about it has already boosted the Bitcoin price.

The value of Bitcoin

While it's difficult to add up all these factors plus ones I might have missed and calculate an objective value in terms of fiat currency for each Bitcoin, I don't think it's very difficult to understand why Bitcoin has value and why that value is climbing. Pundits who are struggling to wrap their heads around why a virtual unit of any kind can have so much value are probably getting hung up on the fact that Bitcoins aren't able to be physically handled; they are intangible. But many things in our modern way of life which have value are intangible. One's legal identity, for example. How many millions of dollars are invested annually to protect from identity theft? One's credit rating is another example. How about data? What about computer games? They only exist on one's computer or the Internet. Facebook isn't tangible either and just like Bitcoin without computers and the Internet it wouldn't exist. And yet it is currently valued at 67.8 billion dollars!5)

One thing is clear, however. Bitcoin has value and that value is increasing.

Devtome Writers | Bitcoin | Economics

My personal policy is I do not share affiliate links on the Devtome. However, if you register your account with Camp BX through an affiliate link you get a lifetime discount of ten percent on trading fees. To register through my affiliate link, please visit http://creativecurrencies.cu.cc/2014/01/07/where-does-bitcoins-value-come-from/ and register through any of the internal Camp BX links.

QR Code
QR Code where_does_bitcoins_value_come_from (generated for current page)