How does Bitcoin, a digital asset have value?
The answer starts with basic economics. Something has value if it checks the following two boxes: scarcity and utility.
Scarcity means that the supply is finite, and in the case of Bitcoin, there’s a set cap on the number of bitcoins that can ever exist: 21 million.
Ben Yu, a blockchain expert, living in San Francisco says this set cap makes it more desirable than other assets even gold.
“We can have things like the California Gold Rush where people find an enormous supply of gold just by accident somewhere, and that can dramatically increase the supply, or technological increases make it far easier to us to mine gold. So we actually see that today we mine gold at four times the rate that we did just a hundred years ago.”
If Bitcoin checks the box for scarcity what about its utility?
Bitcoin utility lies in its potential to be a more efficient currency or commodity that we already have. Proponents say it’s useful for some reasons:
- It is decentralized: meaning no banks, government or single person has control over it.
- It is divisible: meaning you can buy a doughnut with it as quickly as you can buy a house or even a mansion.
“Gold is very difficult to use transactionally. You can’t go to the store, and you shave off some gold shavings to pay for a cup of coffee or buy a car with it.” said Ben Yu.
3. The code is open source, meaning it’s available for anyone to look at, scrutinize and even modify.
None of this uses are intrinsic, and that’s a point skeptics love to talk about.
“The idea that it has some huge intrinsic value is just a joke.” said Warren Buffet.
Other assets and currencies that we trust like gold and paper money don’t have that much intrinsic value either. Take the dollar bill. According to the Federal Reserve, it cost about 12 cents to create a twenty dollars bill. So the rest of that 20 bucks, the remaining $19,88 comes from the trust people place in it. So that’s precisely same with Bitcoin, FIAT currencies, Bitcoin or other forms of money, is just based on the trust people place in it.
Tom Lee, managing partner and head of research at Fundstrat Global Advisors says that bitcoin is no different from Facebook or Google:
“If you ask a baby boomer, can you justify the value of anything that’s a digital business? They probably don’t accept that Facebook, Google, Netflix, Amazon or Apple. These are the largest companies in the SP500, and they are primarily digital businesses build on almost purely digital trust.”
How much can a single Bitcoin be worth?
We see people on TV making predictions all the time. But how they are getting this numbers?
A lot of them do it by comparing Bitcoin to gold because they perceive those two assets as being most similar to each other. The total value for all the gold ever mined in the world is about $7.5 trillion. So, if Bitcoin (21 million coins) were to replace gold entirely, then the potential value of each Bitcoin would be $357,000. If You want to be more realistic and if Bitcoin just captures 5% of the gold market, bitcoins value will be $25,000 per coin.
Metcalfe’s law is another theory that analysts use to determine the bitcoins value.
Metcalfe, an electrical engineer, proved that the value of a social network or telecom company is proportional to its number of users squared. A good way to think about it is like this:
A single telephone is useless, but the value of telephones increases exponentially as others get phones.
Metcalfe’s law holds for Facebook using ten years of data, and Tom Lee says it holds for Bitcoin:
“Since 2013, 94% of the value if bitcoins been explained by just those two variables.”
Ultimately, bitcoins price depend on the demand for it. If people believe in it and continue and continue to buy it more than they sell it, then the price will rise, and conversely, if Bitcoin is sold more than it’s bought, the price will fall.
Many people think that bitcoin is a bubble and that’s predicated on the concept that bitcoin has no value. But there’s reason to believe that isn’t true. By definition, Bitcoin is scarce, and the crypto may have utility as a superior way to store an exchange wealth.