A bitcoin has value because it is able to be exchanged for and used in place of fiat currency, but it maintains a high exchange rate primarily because it is in demand by investors interested in the possibility of returns.
Of course, many other factors influence Bitcoin's value. Read on to learn more about why Bitcoin has value.
- Bitcoin has value because it can function as a store of value and a unit of exchange. It also demonstrates six key attributes that enable its use in an economy.
- The definition of value in a currency has changed over centuries from physical attributes to the velocity of its use in an economy.
- Bitcoin demonstrates some attributes for a currency, but its primary source of value lies in its restricted supply and increasing demand.
Why Traditional Currencies Have Value
Throughout history, many items have been used to exchange value—shells, beads, animal skins, and gold are well-known examples. In this respect, these items are regarded as "money." Money doesn't have to be the printed currency we are all familiar with—all it needs is to act as a store of value, be recognizable as a unit of account, and be accepted as a medium of exchange.
So, if an item meets those criteria, it is money. However, to be successful and long-lasting, it must have:
- Scarcity: It must not be a widely available resource
- Divisibility: Currency should have many denominations
- Acceptability: The intended audience must accept it
- Portability: It must be able to be carried around and exchanged
- Durability: Currency should have a long life span time
- Uniformity: All denominations should be identical not be easily reproduced
Value is then assigned by the users based on its supply, demand for the currency, how much it is worth to them, and how much of a given good or service it can purchase.
The image below compares many different value attributes of gold, fiat, and crypto.
Why Does Bitcoin Have Value?
Cryptocurrency displays the same attributes a fiat currency system does. Here's how it meets them:
- Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
- Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis.
- Acceptability: More and more people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them because their financial systems are failing them. Businesses are accepting them in greater numbers, and more consumers are using them.
- Portability: Bitcoin is able to be used across borders, allowing any consumer with an internet connection to participate in the global economy and have access to financial services.
- Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
- Uniformity: Bitcoins cannot be counterfeited, and don't have a phyical appearance, although there are renditions of coins that represent Bitcoin.
As Bitcoin has also become accepted as a medium of exchange, stores value, and is recognized as a unit of account, it is considered money.
But its exchange rate, the value most often associated with the coin, isn't so much a factor of the people that use bitcoins in transactions; it's the investors buying the cryptocurrency hoping for profits, and traders buying and selling it to make money on price movements.
Because it is in demand by investors (realistically, they are speculators because they are hoping for rewards), Bitcoin commands a very high price, as demonstrated by the exchange rates it has experienced in the past. At one point, 1 BTC was worth less than $1—one decade later, that same bitcoin would have been worth more than $66,000. Prices have decreased dramatically since November 2020, but this volatility has many hoping for a market repeat—additionally influencing Bitcoin's value.
Like any asset or thing of value, the price people are willing to pay for Bitcoins is a socially agreed-upon level based on supply and demand—but some are unwilling to accept that value can be assigned to a digital item. Because of this unwillingness to accept that digital items can hold value in this way, they remain convinced that Bitcoins are worthless. Others who understand the Bitcoin system agree it is valuable.
The market price of Bitcoin is highly volatile and subject to large price swings. As a result, the market price at any given time may vary wildly from what could be considered a fair value. Still, over time, oversold markets tend to rebound, and overbought markets cool off. Thus, it is impossible to say at any given moment whether Bitcoins are fairly valued without the benefit of hindsight.
The cost to produce one bitcoin depends on the cost of electricity, the mining difficulty, the block reward, and the energy efficiency of miners. Some place estimates at about $18,000 per bitcoin.
The Bottom Line
Like all forms of currency, Bitcoin is given value by its users, supply and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.