Bitcoin is a cryptocurrency created for digital transactions. It provides an effective means for users to send and receive money through the internet, and no third party like the government or bank is responsible for its operations. Quite a number of companies now accept it as a means of payment (including Etsy and Domino’s Pizza).
All cryptocurrency transactions go through a decentralized network that is governed by a fixed set of rules. Despite its already widespread acceptability amongst businesses and individuals, concerns remain about its value as a currency and whether it can stand the test of time.
For us to understand and assess the value of bitcoin, we need to familiarize ourselves with the qualities or features that make Fiat currency valuable. Then we can compare those features with that of cryptocurrencies and see how it performs.
What Makes a Currency Valuable?
Simply put, anything called “money” will only achieve value if a nation agrees to assign value to it, and when other countries agree to recognize it as valuable.
In the past, we have attached value to pieces of valuable commodities such as gold and silver, and in turn, use them as a form of currency. But for any kind of money to be regarded as a currency, it needs to have the capacity to maintain its relative value in the long run, without depreciating.
Also, a successful currency should have the following features: stability, accessibility, transferability, durability, utility, divisibility, and scarcity.
Fiat currencies meet all of the criteria mentioned above, but how exactly does Bitcoin compare to these features mentioned?
The capacity of a currency to stay valuable is dependent on scarcity. Without scarcity, a currency can quickly experience loss of value, leading to inflation.
The mere fact that there is just 21 million bitcoin in existence is enough to show how scarce it is. Unlike fiat currency, bitcoin cannot undergo inflation to the point that it loses value. Even if there is any form of inflation, it can be controlled, since there are no new bitcoin being pushed into circulation.
Another factor that contributes to its scarcity is that some of it is gradually being lost forever. Remember, we said bitcoin transactions are irreversible because there is no third party controlling the operation? Well, sometimes, users send bitcoin to incorrect or non-existing wallets, and none of these transactions are reversible.
These and many more reasons contribute to the reduction in its amount available in circulation, thereby inducing scarcity.
Anything that is considered valuable enough to be called a currency must be divisible into smaller units. The divisibility of currency gives it the flexibility to accommodate all forms of transactions in an economy. It also enables it to accurately reflect the value of every product and service present in the marketplace.
Although there is a limited amount of bitcoin in circulation worldwide today, a single bitcoin can be divided further into 10^8 satoshis.
Satoshi is the smallest unit of bitcoin and is equivalent to the smallest unit of fiat currency (e.g $1). A single Satoshi is equivalent to 0.00000001 BTC, which happens to be the smallest unit of bitcoin available.
This shows how vast cryptocurrencies can be, and how they can comfortably accommodate any form of transaction to the highest possible value.
If need be, the division power of BTC can always be increased to more than 8 decimal places, to accommodate a transaction.
One of the significant reasons why commodities like silver and gold were disregarded as a form of currency is the lack of utility. In the process of trading commodities, you would need to bring a valuable commodity to a seller in exchange for whatever you want. And if your merchandise is rejected, you don’t get to make a purchase.
These limitations are what led to the development of fiat currencies in the first place.
The currency’s utility is what gives people the ability to trade a portion of their currency for goods and services needed. Every currency must possess utility for ease of transactions and mobility.
Bitcoin is one of the easiest currencies to transfer as it uses communication channels such as the internet and satellites for its transactions. Plus, almost all online shops accept it as payment for nearly anything sold online.
Some of the industries already accepting bitcoin as payment include the food and beverage industry, banks and payment services, online shops, travel agencies, and many more.
Another quality that a currency is supposed to have is durability. It is this feature of money that allows it to be used and re-used without depreciating.
When it comes to virtual currency, every bitcoin down to the last satoshi can be used countless times and still retain its value without degrading.
Currencies should be easily transferable from one person to another, or from one medium to another.
Bitcoin can stand its ground concerning transferability because the transactions involving it are done using multiple online tools, wallets, and exchanges.
A transfer from one bitcoin wallet address to another bitcoin wallet address is simple, fast, and reliable – irrespective of what tool or exchange you choose to use.
A currency should be accessible by the people so that anyone anywhere can have easy access to it when the need arises. Fiat currencies meet these criteria, and that is why they have value.
With bitcoin, the rate of accessibility is high. With just an internet connection, anyone around the world can have access to it, and use it as they see fit.
The qualities of Bitcoin satisfies all the features of money and can rightly be considered digital currency.
One of the biggest challenges that cryptocurrencies face is price stability and its status as a store of value.
There needs to be mass adoption of bitcoin by the people before it is accepted as a store of value. This will also help to reduce its volatility.