The question that everyone asks before buying their first Bitcoin, or portion of a Bitcoin is, “Why is it valuable? Why is it worth anything? It’s not tangible, how can it be?”
The History of Money
Before we try answering these questions we first have to go far back in history and discover what was considered currency back then.
At first, people traded goods for other goods, for example. A farmer with a bunch of apples would ask a blacksmith if he would trade his steel tools for some apples. If they both agree, the trade happens, if not, the one holding the apples needs to find someone who is willing to exchange their steel tools for his apples.
This caused a few problems. One of the obvious ones was that the apples would go bad if he wouldn’t find someone quick enough. Another problem was what if he wanted to trade his apples for a cow? It would be a heavy burden to travel with all those apples to exchange for the cow. Because of that, people found an easier way of doing business which was trading with gold.
Gold was valuable to all, it was rare and Useful. After some time kings and emperors decided to mint coins with gold which would certify that the coin is of value.
The issue with carrying gold around was that it was dangerous; plenty of people would steal gold from travelers, so then banks came along. You deposit gold into the bank and in return, the bank would give you IOU notes that were trusted by all. Problem with that was that the bank didn’t actually have as much gold as distributed IOU notes.
Later on, the US Dollar was created and at first, was backed by gold. The currency was accepted worldwide and was even held in reserve by many countries. It changed the way trade was done. Before WW1, 1 ounce of gold was worth $20.67 USD. In the 1930s, the United States left the gold standard because it limited money printing. They believed that printing more money would be more beneficial for the country. Now, the dollar is losing its value every year because of inflation.
Now you have a clear understanding of the history of currency and what gives it value.
So what makes a currency valuable? Usability, Supply, demand, and government acknowledgment.
Now, what is Bitcoin and does bitcoin have all those characteristics?
In short, Bitcoin is a decentralized digital currency that can be transferred to anyone on the internet without a middleman/3rd party. It runs on the “Blockchain” which is another word for ledger, but this ledger is digital and can be seen by all. It allows anyone, even without an identity to send out any amount of money without worrying about the banks or governments freezing or confiscating your funds.
Supply & Demand
The creator/creators of Bitcoin, aka Satoshi Nakamoto put a limit on the amount of Bitcoins to ever be in existence. This amount is 21 million which is why it is so scarce. If every millionaire in the world would want to own 1 bitcoin it would not be possible. This is one of the main reasons for its demand.
For years, the US government didn’t interfere with Bitcoin. It didn’t believe that it would this scale this much. The only interference was when there were illegal activities taken place like In the Silk Road, an online black market. Now, the US government is requiring all bitcoin holders to notify the IRS on their holdings. This is a big step because this now legitimizes bitcoin as something of value to not only the people, but also to the government.
To conclude, by learning the history of currency and how it changed over time, you can now understand why bitcoin is not just valuable, but why its projected value to many, is worth more than gold, and even more than the inflated US Dollar.