Most skeptics from outside the crypto community have been asking the same question for years. They have been asking, “where does the value of Bitcoin come from?” and apparently, this has become their biggest point of concern. They refuse to jump into crypto because apparently, no answer has satisfied them.
However, they seem to forget that valuable assets often start from the point of belief. The thing is that, when there are enough people who believe in the same thing, that thing suddenly becomes valuable. This is true for many assets. This article will help you analyze the valuation of Bitcoin and why it matters a lot.
Enough People Believing In Bitcoin As A Hedge Against Fiat
The main value of Bitcoin comes from a lot of people (all around the world) who believe Bitcoin is a good hedge against fiat. Bitcoin was launched by Satoshi Nakamoto, who believe that people should have full control over their own money. Satoshi was known as a strong anti-fiat advocate. He claimed that the root problem with fiat is all the trust that’s required to make it work. However, the history of fiat currencies is full of breaches of this trust.
People who have been supporting and HODL-ing bitcoin believe in this same idea. They believe that fiat currencies would not be able to maintain their value over time. Bitcoin, on the other hand, embraces a deflationary model. The maximum supply is 21 million and mining gets harder over time (as proven by the halving mechanism every approximately 4 years).
The main value of Bitcoin comes from the fact that enough people believe in this same idea. When there are enough people who see that Bitcoin is a good hedge against the devaluation of fiat currencies, the price will go up, as there is more and more demand as time goes by.
This pattern was also the reason why physical gold keeps becoming more valuable. It does not have any practical use except to be used as jewelry or accessories. People buy physical gold because they think it’s a good hedge against fiat currencies’ inflation problems. That’s why gold keeps going up in times of global financial crisis like this year.
While Bitcoin has not yet achieved the status of gold as a widely accepted store of value, it has (at least) become a default face for digital currencies. Yes, for now, gold is the de-facto asset whenever people fear a financial crisis. Bitcoin is not there yet, but it is getting there slowly but surely.
Decentralization And Transparency
Bitcoin becomes an interesting asset for your investment because it’s decentralized, and it prioritizes transparency. Policies for fiat currencies are often unpredictable as central banks can magically create new supply out of nowhere whenever they think their countries need some help. The Federal Reserve has created trillions of supply worth of USD to help the US economy during the time of COVID-19 pandemic.
This is different from Bitcoin. With Bitcoin, nobody can manipulate the supply. All of them have to compete against each other to solve mathematically difficult puzzles just to get the block rewards. As of now, the block reward is only 6.25 coins per block, and it will decrease to 3.125 coins per block in the next halving event (approximately four years from 2020).
And don’t forget that Bitcoin’s max supply is only 21 million. This means that everybody knows Bitcoin would not increase its supply after the whole 21 million of Bitcoins are successfully mined. The psychological effect is huge. When everybody knows Bitcoin’s has a supply limit while fiat currencies don’t have them, obviously, BTC becomes much more attractive to HODL in the long term.
This kind of transparency (about the max supply) is the thing that makes Bitcoin attractive. Even if it is not really being used for anything. Yes, many skeptics often complain that BTC is not really used for anything, and there’s no mass adoption compared to fiat currencies.
The thing is, you don’t need mass retail adoption for something to be massively valuable. Just look at physical gold.
Can Bitcoin Prove Itself As A Reliable Store Of Value?
Now here’s the hard question. Bitcoin had never been tested by any financial crisis before this year (2020). Bitcoin was created post-2008 global financial crisis. Technically, this year (2020) is the first year Bitcoin gets tested by a global crisis. Fortunately for Bitcoin, it has successfully passed its big test. Apart from early March’s flash crash, this year has been very good for Bitcoin and the whole crypto market.
Does it mean that Bitcoin has finally proven itself as a reliable store of value against global financial instability? Nobody has a crystal ball, but so far it’s been doing quite well.