This is why digital currency has real value

This is why digital currency has real value

Bitcoin's price has been on a rollercoaster-like ride since its inception in 2009. But it wasn't until last year that the most popular cryptocurrency in the world saw massive gains, starting the year at under $1,000, and breaking the mark of $19,000 in the last days of 2017.

However, on Tuesday its value took a hit by plunging over 20 percent, trading as low as $10,205, according to Coinbase data.

As Bitcoin's popularity surges and its price rises and falls, more and more people keeps asking one question: How does Bitcoin, something essentially invisible and intangible, have value?

The answer is simple: scarcity and utility.

In economics, something has value when it has a finite supply. In the case of Bitcoin, it has a set cap of 21 million bitcoins. 

That's the deal with Bitcoin's scarcity. But what about its utility?

Many believe the cryptocurrency's utility lies in its potential to be a more efficient commodity than we already have, and the experts on this field agree on that for a number of reasons.

For once, Bitcoin is decentralized, meaning no government, bank or single person has control over it. It's also divisible, meaning you can buy smaller things as simple as your groceries, or as big as a house.

Bitcoin skeptics often critizise its use is not intrinsic. Gold, for example, is thought to have intrinsic value because of its applications in industries like dentistry and electronics. But as you tackle those claims, it becomes clear that gold and paper money don't have that much intrinsic value either.

According to the World Gold Council, in 2016 only 15 percent of gold was used in industries. The majority went toward making jewelry and gold bars and coins — items that have value mainly because they're trusted to be valuable.

With paper money, the U.S. Federal Reserve says it costs about 16 cents to create a $100 bill. So the rest of that hundred dollars —the remaining $99.84— comes from the trust people place in it.

It can be hard to see the digital currency as having value because you can't hold it in your hand like you can a dollar bill or a gold ring.

But the answer can be quite simple: Bitcoin is a digital business, the same way big companies like Facebook, Google, Netflix and Amazon are. We are talking about some of the largest companies in the S&P 500 and they're primarily digital businesses, relying mostly on digital trust.

At the end, the value of a network is proportional to the number of users in it. Facebook would be useless if it had only one user. But its value is attached to the number of its users. The more they are, the more valuable that company is. 

Many people think that Bitcoin is a bubble, and that's based on the concept that it has no value. But by the definition of scarce and utility, there's reason to believe that that just isn't true.

By Alejandro Cortés

  • Alejandro Cortés

    Alejandro Cortés

    Egresado de la Escuela Mexicana de Periodismo Carlos Septién García. Ha trabajado para varios periódicos en México y los Estados Unidos desde 2002.

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