How Does Bitcoin Get Its Value?
October 22, 2020
As a bitcoin enthusiast, you may have wondered, what is bitcoin backed by? Bitcoin is backed by a public blockchain ledger that contains proof of all the transactions on the network. Bitcoin is limited in its supply, making it rare, just like precious metals like gold.
It is a commonly conceived idea that Bitcoin has no value just because it is not backed by anything physical. In fact, Warren Buffett, a billionaire tycoon, also questions the value of BTCs on a similar basis. Unlike fiat currencies that are supported by physical assets in a secret vault, BTC has a blockchain ledger.
While we argue Bitcoin’s irrelevance as a currency, we cannot ignore how it stands at a market value of over $10,000 USD and a market capitalization of over $200 Billion. 1 BTC is clearly worth more than $1 USD or $1 AUD, but why isn’t it accepted worldwide as a legitimate currency?
When we question Bitcoin and its backing, we also need to consider regular currencies and their support. We rule off Bitcoin as a standard payment mode when we don’t know what our fiat currencies are backed by! But before we talk about bitcoin ledger, we must address the elephant in the room.
How are Regular Currencies Backed?
Every regular currency has a specific value with which you can purchase goods and services. We tend to not think about it because that is how the financial system has been operating for hundreds of years. However, how do you know that five Australian Dollars are worth five Australian Dollars?
In the early days, you could exchange your money for gold and take it home. But later on, fiat currency was introduced, and it had no physical backing. Regular currencies operate on the trust of the people. This confidence is crucial to the working of the financial system and is also affected by the government, banks, and people in power. We accept regular currencies without being sure about the value it will hold by tomorrow.
We can pay $5 AUD for a loan of the same amount, and any lender would accept it. Overall, the system works, and people have accepted it. However, ‘debt mountains’ are piling up, and we may have to deal with the consequences one day.
We know that we can offer money for goods and services, and people will take it. There was no better alternative for fiat currencies until cryptocurrencies emerged.
What’s a Blockchain Ledger?
Bitcoin operates on a secure network that increases security daily, based on its unchangeable, unbreakable, and incorruptible mathematics. This secure network is known as the blockchain ledger. It operates independently without any human involvement.
The blockchain ledger is entirely self-checking and closed. It is not controlled by any individual or any government or country- it is designed to operate this way, and the concept is complicated.
The ledger contains mathematical blocks with encrypted information of all the transactions on a virtual network; this is Bitcoin’s greatest strength and weakness. The virtual guarantee system, although highly secure, can be quite complicated for people to understand and build confidence in.
Your Bitcoin transactions are backed by a system of complex, immutable data on high security, which has prevented Bitcoin from being hacked and will do so for the foreseeable future.
What is Fiat?
Fiat currency is a government-issued currency that is not backed by any physical means. The confidence of the people primarily backs it up. All our modern paper currencies are fiat currencies, for example, the Australian Dollar.
Fiat currencies gained popularity in the 20th century due to the influence of governments and central banks. The value of fiat currency is maintained by the government and the parties involved in the transaction. With a lack of backing support, fiat currencies can lose their value due to inflation. If the market crashes, fiat currencies may not be of the worth they are today.
Bitcoin vs Fiat?
Bitcoin is an open-source and non-proprietary cryptocurrency, meaning that anyone can read, investigate, and learn more about it. Miners mine new bitcoins and verify transactions. In contrast, fiat currency is printed and regulated by the government and central banks.
Fiat currencies are more stable and regulated than Bitcoin. However, compared to fiat currencies that are printed and that operate on the people’s confidence, Bitcoin is backed by a legitimate entity.
Bitcoin is theoretically free from real-world elements such as government, stock markets, etc. whereas fiat currency’s value depends on these elements. The financial crisis of 2008 was one of the biggest threats to fiat currency, and you never know when such a situation could repeat itself.
There is a limited supply of Bitcoin, whereas governments can print an unlimited amount of fiat money. Due to the limited supply, Bitcoin is more valuable than fiat, similar to precious metals like gold and silver.
Bitcoin is still miles away from becoming a mainstream currency. The level of confidence that people have in fiat currency is not yet visible for cryptocurrencies. Although Bitcoin has been around for more than a decade, we haven’t seen mass adoption.
Is It Worth Investing In Bitcoin?
Bitcoin is the next step to financial evolution and has a reliable blockchain ledger backing it. At the moment, it is seen as a niche project tackling the global financial system. As the confidence in bitcoin rises, so will its value.
The confidence in fiat currency remains high even though any physical entity doesn’t back it. At the same time, people refuse to be confident in Bitcoin because it has no physical asset backing it. Fiat currencies will continue to be a mainstream currency for the foreseeable future; however, the same confidence can drive Bitcoin. The crypto world is growing, and with it, Bitcoin will too. As the demand for Bitcoin increases, so will its market value.
If you want to start investing in Bitcoin, you can head over to our exchange. You can also take part in crypto trading or sell your existing BTC for profit.