Since the cryptocurrency’s initial launch in 2008, the cost of a single Bitcoin has significantly increased, with significant ups and downs. It rose to its highest in April, somewhere near $60,000. Since then, it has fluctuated. Despite the turbulence, investors are still interested in Bitcoin because of its track record of steadily increasing and sustaining value.
But unlike a stock, which has value because it represents a portion of firm ownership, or even a bond, which reflects the value of a loan that will be repaid at maturity, it can be challenging to determine the value created by a decentralized, digital currency with such a short history. Investors are undoubtedly alarmed by these changes, but they also wonder why Bitcoin is valued in the first place.
Bitcoin as money and the value of a currency
People think that money has value, so civilizations and other groups have chosen to use it as a medium of exchange. After the end of the gold standard, fiat currencies spread (which mandated a holding of physical gold back every dollar).
Fiats, like the U.S. dollar, are unbacked by any physical asset and only have value because society accepts them. The creator and publisher of the cryptocurrency known as Bitcoin is a man who goes by the alias Satoshi Nakomoto. It has numerous qualities as a store of value with modern currencies like the American dollar and the yen from Japan:
- Limited availability. Twenty-one million bitcoins are available at most. More than 21 million Bitcoins will never exist. Many analysts believe that Bitcoin’s value is greatly influenced by its scarcity or restricted quantity.
- unable to be duplicated. Because Bitcoin uses a blockchain system, it is impossible to counterfeit one. The blockchain records all transactions and ensures the system continues to function following the initial guidelines proposed by Satoshi Nakomoto.
- Transportable. Bitcoin is very portable. It’s simple to transfer it across bitcoin wallet or exchange account.
- Transferable. Transferring bitcoin to another user or merchant is not too difficult. To give someone bitcoins, you only need their public key (wallet address).
All of these elements support Bitcoin’s classification as a currency, but they do not account for its tremendous price appreciation and allure as a store of value. After all, storing money in cash isn’t seen as a wise investment plan because your U.S. dollars would normally appreciate far more in an investment vehicle than in cash.
Bitcoin is exceptional even among cryptocurrencies because of its price. Another form of digital asset may be created with the same features, but it might never be valuable. Why Bitcoin, then?
Why is bitcoin valuable
Briefly put, according to Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business, Bitcoin is appreciated “because people consider it useful.” And if you think that’s a little chaotic and silly, you’re right.
The belief that Bitcoin will one day be worth more than it is now driving up demand for it, and like gold, its value keeps rising. According to Kiana Danial, author of “Cryptocurrency Investing for Dummies,” gold is dirt that people determined was worth to them.
Humans assign values to items like gold and your $100 bill. The $100 bill itself has no intrinsic worth. We give it that worth. Like gold, you can’t just go into a store and buy Bitcoin; you can buy and keep it. But gold has one quality that Bitcoin doesn’t have, at least not yet: it’s been there for a lot longer, so its long-term worth has been repeatedly demonstrated.
You want to know, according to Routledge, “will your Bitcoin be acknowledged as a Bitcoin after a year.” The answer to that, according to Routledge, is based on the prospects for blockchain technology and the conviction that it will keep gaining acceptance among the general public.
What should investors understand?
Only a tiny portion of your total assets should be invested in Bitcoin because of how much its price varies and how difficult it is to predict whether it will continue to appreciate or fade into oblivion.
Experts advise limiting your cryptocurrency investments, like any other speculative investment, to less than 5% of your whole portfolio. Additionally, avoid putting money into cryptocurrencies at the expense of other financial objectives like retirement savings or emergency savings.
People buy Bitcoin similarly to people buying gold, not because they expect to be able to walk to the shop and use it, but because they anticipate it to preserve its value. Although there are several alternative cryptocurrencies, Bitcoin is only the most well-known. Investors must consider several factors while buying different cryptocurrencies.