What is Bitcoin and Why Does it Have Value?


What is Bitcoin? In layman’s terms, Bitcoin (or BTC) is a digital asset that individuals, companies and other entities transact via the blockchain network. Bitcoin works as a medium of exchange (much like traditional currencies) that utilises cryptography.  As a result, many of its users coin it (pun intended) with the term ‘cryptocurrency’.

The key difference between Bitcoin and traditional currencies is that the former operates on a decentralised network.  This means there is no government or other ‘centralised’ organisations behind the creation, recognition, and circulation of Bitcoin. In fact, Bitcoin relies on an infrastructure that is supported by its users and industry participants such as miners.

Bitcoin has been, since its inception, the leading cryptocurrency in the market. It has a total market capitalisation of more than USD$200 billion and accounts for more than 60% of the market capitalisation of all cryptocurrencies at the time of writing.

Why does Bitcoin have value?

To someone who is new to the industry, it is natural to question the value of Bitcoin. At close to USD$13,000 per BTC at the time of writing, many think ‘it is too expensive already, I think I have already missed the boat’. We believe this is far from the truth.

The analysis

Firstly, even though it has been more than 10 years since the inception of Bitcoin, a lot of people are still not familiar with its divisibility. Each user will not need to own a whole BTC. In fact, there is a view within the community that as time progresses, it would be uncommon for the average person to have enough resources to own an entire coin. The smallest unit of BTC is called the Satoshi, which represents 0.00000001 BTC. There is no harm to own, for example, 0.05 of a BTC, as it is still a sizable investment after all!

Secondly, Bitcoin, similar to many other assets, derives its value from the concept of utility. If people use an asset in a way that satisfies human needs, then it has value. The vice versa is also true. The utility of BTC is twofold: 1) its utility as a medium of exchange; and 2) its utility of being a store of value. Bitcoin’s utility as a medium of exchange is very evident in regions where the financial system is fragile, the cost of cross-border money transfer is high, and/or capital controls are unreasonable. In those regions, people use Bitcoin as the preferred medium of exchange over traditional legal tender. Having said this, Bitcoin’s utility as a store of value is also invaluable.

Many investors and participants in the community view Bitcoin as the ‘digital gold’. Put simply, it has all the attributes of gold, including being scarce, divisible, fungible, durable and resistant to counterfeit. Also, BTC is far easier to store and transport compared to gold.

Our conclusion

Ultimately, the utility of BTC both as a medium of exchange and store of value stems from recognition and mass adoption. The mass of followers that BTC has gathered over time is a key factor that Bitcoin carries as much value as it does today. In other words, the popular adoption of Bitcoin as an asset grants value to the asset itself. The authors believe that at the time of writing, Bitcoin has already passed what people label as ‘critical mass’.  This means that it has obtained sufficient recognition in the community which makes its continued growth a high likelihood event.

Interested and wondering where you can get your Bitcoin?

It really depends on where you are located. However, if you are located in Australia…

About Coinstash

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