The value of bitcoin, the world’s best-known cryptocurrency, has reached an all-time high of more than $23,000.
The price of bitcoin has surged by more than 400% this year from a low point of around $3,600 in March when the coronavirus pandemic triggered a deep sell-off in financial markets around the world.
Have you ever wondered why Bitcoin is so expensive or what makes Bitcoin valuable? In this article, Liquid aims to explain what makes Bitcoin useful.
What makes any currency valuable?
To understand the idea of any currency (USD) being ‘backed’ by something valuable, we need to understand its relationship to Gold.
In 1971, then-president Richard Nixon put an end to the “Gold standard.” Before that, the USD value was directly connected to Gold’s value.
Currently, the U.S treasury securities back the dollar. Treasury securities are the government’s way of collateralising debt.
A central bank in each country manages its respective fiat currency. This independent governing body exercises responsibility for the fiat currency supply and the regulation of the banking system.
In a nutshell, fiat money is backed by nothing but trust and faith in the currency’s value.
Why does Bitcoin have value?
Bitcoin’s value derives from the fact that BTC’s essence is mathematics and algorithm (code). It is known as the Proof-of-Work algorithm.
The code is run simultaneously on computers worldwide, forming a chain of blocks, also known as Blockchain — a technology that powers Bitcoin and various other cryptocurrencies.
That is where things get interesting. One central entity never controls Bitcoin. Instead, it is a decentralized cryptocurrency.
Powering Bitcoin is a decentralized network that functions on the math and robustness of the code, forming a Proof-of-Work algorithm that is difficult to solve (without a massive computing power), let alone cheat.
Ultimately, this whole system makes the Bitcoin Blockchain network secure and trustworthy, and as more transactions occur, the chain of Blocks gets more substantial, and so does the Proof-of-work method.
The reward for mining Bitcoin is reduced by 50 percent every four years. It is known as Bitcoin Halving.
The intrinsic value of Bitcoin derives from the fact that Bitcoin supply is limited to 21 million. Therefore, not more than 21 million Bitcoins can be mined or be in circulation at any given moment.
As we inch towards a genuinely cashless economy, it is only a matter of time before witnessing the mass adoption of cryptocurrencies such as Bitcoin and Ethereum. Since there is a limited supply of Bitcoin, the demand and value of Bitcoin will only increase.
Characteristics of Bitcoin
Bitcoin’s value comes from its characteristics. There are five characteristics of Bitcoin, which makes it a ‘valuable’ cryptocurrency:
Bitcoin is digital and does not exist in a physical form. For this reason alone, Bitcoin is durable since it cannot experience wear and tear.
Bitcoin loves on the Blockchain network, which makes it a portable currency. You can quickly transfer Bitcoin from one wallet to another. All you require is a working Internet connection.
Bitcoin is a divisible cryptocurrency. One Bitcoin is made up of 100 million satoshis. Therefore, you can purchase as little as 5 USD worth of BTC, which totals approximately 49 thousand satoshis.
Bitcoin flaunts uniformity as it cannot be counterfeited, courtesy of the proof-of-work mechanism that consists of the math and code.
- Limited supply
As we mentioned before, Bitcoin has a limited supply of 21 million, and as it matures, Bitcoin adoption continues to increase worldwide.
Bitcoin Bull Run of December 2020
There are three main reasons why the ongoing Bitcoin bull run will be different from the one in 2017:
- Institutional investment in Bitcoin
We finally have institutional money flowing into the Bitcoin space. For a long time, crypto enthusiasts have been waiting and expecting institutions to start pouring money into Bitcoin. Every single day, we seem to wake up to new institutions investing in Bitcoin. For example, PayPal has 26 million merchants that will be able to accept cryptocurrency as payments.
- More mature and robust infrastructure
In 2017, one of the significant issues was exchanges could not handle the influx of new customers looking to get involved in cryptocurrency. On top of that, people had to wait up to five days for a simple Bitcoin transaction to go through while bearing astronomical transfer fees. In 2020, exchanges are geared up and ready to handle the influx of new customers.
- More number of entities trusting Bitcoin
Major institutions and credible companies being vocal and transparent about their investment in Bitcoin contribute to this Bull Run. It helps people to realize that Bitcoin is here to stay. The stamp of approval will appeal to retail investors the most.