How does Bitcoin work? Why does it have value? This article answers these questions and others related to Bitcoin economics.
Although Bitcoin now has about 13 years, numerous questions, speculations, analyses, and arguments are ongoing. Of course, Bitcoin has now become a common household name. But apart from those who use it or are part of its more extensive network, not many ordinary people understand the economics of Bitcoin.
What Is It?
For a start, Bitcoin is simply a digital currency. Just like the physical dollar or other fiat currency, you can use Bitcoin as a means of payment. However, unlike the fiat currency, Bitcoin does not have a physical status. Additionally, while governments through central banks control fiat currency centrally, Bitcoin is decentralized with no single control entity.
Bitcoin is also a digital asset that some consider ‘digital gold.’ That’s because of the high value of Bitcoin as an investment asset. Trading in Bitcoin is a lucrative business. Like you can trade in various cryptocurrencies through biticodes, and you can also trade in Bitcoin through various crypto trading platforms.
The best place to start understanding Bitcoin’s economics is its value. Two questions will guide this. First, does Bitcoin have value? Second, assuming that Bitcoin has value, then what explains this? Let’s answer each question below.
On the first question, the answer is yes. Bitcoin has value. And this is true because Bitcoin has a price that determines its value. Although the price is volatile, it still means that Bitcoin has value. For example, the cost of Bitcoin on September 12, 2022, is around $22,000. The price may change at any minute and go up or fall. The mere fact that Bitcoin has a price means that it has value.
Additionally, on the issue of whether Bitcoin has value, it has value because it also acts as a store of value. You can buy Bitcoin and keep them as a store of value. Instead of maintaining fiat money in the bank, you can decide to convert it to Bitcoin. And this means that Bitcoin holds value although, because of high price volatility, the value can change at any moment.
On the second question, Bitcoin has value because of its scarcity and use. Bitcoin’s maximum supply is 21 million coins. After reaching that maximum limit, there will be no more Bitcoin. Already, over 90% of this is in reserve. So, as the supply of Bitcoin continues to decline, the demand continues to grow.
Additionally, it’s difficult to counterfeit Bitcoin due to its blockchain technology. Blockchain creates a decentralized and distributed digital ledger with no single centralized control or management. Everyone on the Bitcoin network can see and verify every transaction in Bitcoin. With millions of miners on the Bitcoin network, it is realistically impossible to double-spend.
Bitcoin As A Means Of Payment
People use Bitcoin as a payment means. Like the dollar or the euro, people can use it to pay for goods or services in many retail outlets. Many retailers accept Bitcoin payments. They do so because they know that it has value. If it lacked value, no retailer would take it as payment.
Although Bitcoin acceptance as payment isn’t everywhere, like fiat money, this does not mean it lacks value. We must realize that Bitcoin is only a few old, unlike fiat money which is quite old. So, many people may not have known or understood it well. Nevertheless, with the growing trend in digital payments, Bitcoin will become more widely accepted as a means of payment.
The economics of Bitcoin is simple. It primarily revolves around its value and its use. To understand Bitcoin better, you need to understand the underlying blockchain technology and how it works.
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