Why Does Bitcoin Have Value?

Concept image showing a physical bitcoin representation on left side breaking apart on right side to digital zeros and ones

Bitcoin (BTC) has remarkable fundamental characteristics that determine its behaviour and how we humans react to it. But first let's define fiat money.

Fiat money is a currency used as a medium of exchange, established as money usually by a government. Fiat monies suffer from inflationary pressures, so devalue over time. Fiat money only has value when backed by a government and / or other parties who use it and agree its value.

Table of Contents

Bitcoin (BTC) Has Two Important Aspects Plus Many Features And Benefits

The 'character' of Bitcoin is driven by two main areas:

  • Technical aspects, and
  • Human interactions.

Let's explore some key features, benefits and traits of Bitcoin in comparison with other similar technologies:

  • Bitcoin as an intangible asset is:
    • Limited, a finite supply.
    • Rare (and getting rarer).
    • Verifiable.
    • Easily storable.
    • Easily transferable.
    • Secure.
    • Durable: mined Bitcoins do not wear out over time.
    • Permission-less. The Bitcoin network is open to all. Race, gender, religion, credit-worthiness, class perceptions ... none of that matters in the Bitcoin world.
    • Deflationary. The opposite to fiat monies like US dollars, Euros, UK pounds, etc, which are devalued through inflation.
    • Global. And beyond, once more humans are living and working in space.  
  • Bitcoin doesn't need to be backed by anything other than the key drivers above.
  • Bitcoin built on the blockchain is yet another of a long list of remarkable inventions that have changed our world for the better. Most great inventions tend to first be ridiculed, then accepted, then desired, then promoted and finally celebrated. Most of the rest of the world will catch up eventually.
  • Bitcoin may now be the rarest source of digital value on Earth! More rare than gold. Why: more gold can be found on Earth and in space, however, the Bitcoin supply is fixed in its code at 21 million (less in practice). More below.
  • Bitcoin is secured though robust, proven computing code and with the help of around 10,000 distributed validators (electronic nodes) situated around the world.
  • Bitcoin is powered by the human desire for gain and / or idealism for a better world. Enlightened human psychology seems to be central as to why Bitcoin seems to have enduring value: to-date almost 13 years of exponential growth over the period.
  • Some folks, afraid or nervous of Bitcoin, tend to use blunt, discounted analogies like Tulip manias. Yet Tulips don't last 12+ years and soak up billions or trillions of dollars. And fads are temporary. 
  • Recently, the Bitcoin marketplace had a market cap of over $1,000,000,000,000 - that's one trillion+ dollars. Who would invest or speculate those kinds of numbers on something that has little or no value? I certainly would not. So there is clearly value in those Bitcoins, as private investors, large companies, and institutional investors have discovered. While commerce takes place, the world computer machine that keeps Bitcoin working seems to grow every day.
  • Yet so many other cryptocurrencies seem as though their own price value is tied to the price of Bitcoin. When Bitcoin's price goes up, most others may follow. Or, when Bitcoin price falls, so do many others. Ethereum is another high profile cryptocurrency, whose price may soon be determined by Ethereum itself, so not influenced by Bitcoin.
  • Contrary to what some might think, Bitcoin seems tailor-made for our climate-change age. Here's why:
  • Bitcoin can also be a currency too, especially useful for economies that have high inflation of their fiat currency. Though as a currency, Bitcoin works best when used with an add-on called The Lightning Network. Sober key point: right now in our world history, as a currency, Bitcoin is the only currency that cannot be devalued.
  • Bitcoin can be transferred from one party to another anywhere around the world that has an Internet or mobile phone connection.
  • If you have the good fortune to live in an open democracy, most likely your government and / or bank allow you to buy and sell Bitcoin. Though you may receive warnings and cautions. Don't buy or sell Bitcoin until you have spent some time learning about how to do those activities safely and securely. 
  • For people who live under repressive regimes, or those struggling against a hyper-inflating economy, storing some of their money in Bitcoin can mean the difference between going hungry, or even staying alive. For these people, access to Bitcoin can literally be a lifeline. 
  • Bitcoin doesn't follow standard investment or speculation patterns, though Bitcoin's own patterns are becoming clearer every day. Bitcoin cuts its own path. Is that why it is so misunderstood and frustrates so many people, yet delights and bewitches others?
  • The Bitcoin network is provably secure.
  • In recent years, 'security issues' seem to always be traced to human behaviours, not the Bitcoin network. Specifically:
    1. Poor security on websites.
    2. Corrupt 'insiders' or third-party managers.
    3. Inadequate storage practices.
  • A surprising unexpected benefit of Bitcoin speculation is that it helps prevent excessive consumerism. How so: when people 'invest' in Bitcoin, they're not spending money on many other wasteful things or activities. Some feel like they are saving for their future. Contrast with leaving money in a conventional 'savings' bank. If inflation is say 4%, and you don't get at least 5% interest in your bank, the value of your money is disappearing. The big problem: inflation can change faster than interest rates, so do you still lose whatever you do? Bitcoin however, is different: it 'sings to a different tune'.
  • Bitcoin is a benefit to the world. Why: it is one of the first globally popular blockchains. It will eventually be fully powered by renewable energy. As a result, thousands of additional blockchains are being developed. An entirely new industry is being built. In time, blockchain engineering will transform our world for the better. Less waste, lower costs, more efficiency. Big changes take time. We can thank Bitcoin's inventor, Satoshi Nakamoto, and the millions of people involved developing and promoting Bitcoin, cryptocurrencies, and blockchain.

Owning bitcoins is one of the few asymmetric bets that people across the entire world can participate in.

– Vijay Boyapati.

More Reasons Why Bitcoin Attracts Interest

  • For growing numbers of people around the world, the insatiable human desire to possess and use something of undoubted demonstrable digital value seems to be the big draw of Bitcoin.
  • Bitcoin has a maximum of 21 million coins. Though in practice, some Bitcoins have been lost, probably forever, so there might only ever be about 16 - 17 million usable Bitcoins, maybe less. Relative scarcity on a global scale builds desire. 
  • Repeatedly, Bitcoin has a proven track record of resilience to attacks and price shocks. The longer Bitcoin exists, the stronger it seems to become.  
  • Bitcoin co-exists alongside fiat currencies like the US dollar, UK pound, Euro, Yen, and so on. Nevertheless, Bitcoin works in almost the completely opposite way to the way central bank digital currencies (CBDCs). How so: Bitcoin is freely driven by desire to own counterbalanced by its current price. However, CBDCs are fully controlled and tracked by individual governments.
  • Bitcoins can be sold for fiat currencies and fiat currencies can be used to buy Bitcoin.
  • Website business providers, writers, and others can opt to be paid in Bitcoin, alongside, or even in place of other 'standard' currencies. Though if you opt to accept payment in Bitcoin for products and services you may sell, remember, tax treatment of Bitcoin income is often still unclear and messy. So to prevent shocks later, do keep good business records and be able to show your tax authority where all and any Bitcoin gains have come from.

The Bitcoin blockchain is the new wonder of the world, with more work and human ingenuity than went into the Great Pyramids of Egypt. The biggest computation ever done. A digital monument. A verifiable artefact of digital gold — the foundation of a new digital age.

– Adam Back.

What Tempers Bitcoin?

While Bitcoin is incredibly strong and consistent, we humans are not so robust. We can be over-emotional, too erratic, nervous, lazy thinkers. So some factors temporarily affect how Bitcoin performs. For example:

  • A lack of understanding of the tech behind Bitcoin.
  • Irrational fears.
  • Overreacting to silly stories that appear via news media sources.
  • Incredulity and overconfidence. Sometimes, some folks simply can't handle their good fortune, so panic.

Moreover, there is an ocean of nonsense, false information, ignorance about Bitcoin, even from so-called 'accredited' sources. Often, unique agendas may be involved.  Similar trends happened in the past for many new inventions as they started to have an impact on the world. Education, re-education, and patience seem to offer an antidote to false perceptions.

What Backs Fiat Currencies?

Today, at the time of writing, fiat currencies like the US dollar, UK pound, Euro, Japanese Yen, etc., all 'float' in the sense they are not backed by anything outside of government influence. Is that enough? Maybe, maybe not. Time will tell.

The economic and political state of our governments determines the confidence we have in a currency. Confidence is a form of belief or hope.

Nevertheless, when talking about money in general, some people think our money must be 'backed' by something else, like gold. Before June 5, 1953, the US dollar was indeed backed by gold.

Then, in August 1971, ravaged by the rising costs with the Vietnam war, and more, US President Richard Nixon fully broke the direct convertibility of the US dollar into gold. Since then, the US dollar value has simply 'floated' in relation to the value of other world currencies.

So in one sense, today, the US dollar isn't 'backed' by anything. Though some might argue, the US government is the backer-of-last-resort, through using its 'magic money printer' otherwise known as quantitive easing.

Governments that choose to 'print' as much digital currency as required, on demand, may solve current crises. However, with little oversight about future effects, are they playing a dangerous experiment with money? No one can know for sure what the future ramifications will be. Bitcoin appears to fix this systemic risk for its own 'currency'.

If governments lose control, inflation and hyper-inflation can take place. Bitcoin however, is a limited supply that cannot therefore inflate.

Yes, Bitcoin's value will vary, sometimes up, sometimes down, though the general trend seems to be a lot more up than down. And that's why its price, over time, has consistently risen over 12+ years to-date.

Bitcoin changes *everything* … for the better. And we will forever work to make bitcoin better.

– Jack Dorsey, CEO of Twitter Inc.

An intriguing thought: given all that we've explored here, we wonder, are perhaps currencies like Bitcoin the last honest money in existence? What do you think?

To be fair, gold too is an enduring honest form of money. Why: to create gold, at some stage, someone has had to pay for it using profits from income earned through selling goods and services.

The only problem: is gold 100% environmentally dirty? Bitcoin and cryptos are much less dirty and seem to be getting cleaner every day. Or maybe in our modern world, is gold simply 'ready for retirement after spending thousands of years occasionally popping its head above the ground?

What Sustains Bitcoin?

To some people, Bitcoin is money. To others, Bitcoin is an investment or speculative bet that may be worth more to them in the future. Still other people think Bitcoin represents hope for a better, fairer world.

We humans are complicated. Even after 12+ years of grinding its way through over 416 'death predictions' (to-date), Bitcoin BTC continues to grow and thrive.

Every day that Bitcoin 'lives', it seems to get stronger, more resilient to shocks.

While the Bitcoin technical side simply behaves like a predictable machine, its human component — us — is more confounding.

While no-one truly knows the future of Bitcoin, the Bitcoin tech world machine simply follows its code instructions and continues to keep working constantly 24 / 7 / 365.

Even so, to-date, we humans are the weakest link in the Bitcoin story. Sometimes, we misunderstand how Bitcoin works and sometimes we panic — easily it seems. The solution really is to calm down and carry on.

Even in 2021, Bitcoin still isn't yet fully understood from a human behaviour perspective. I suspect we will take at least 20 years to work out better why Bitcoin intrigues and fascinates the human psyche. What will the next 20 years bring?

Yet Bitcoin represents a kind of insurance against the worsts effects human economic stupidity. There may come a time when the world will be relieved that Bitcoin exists, that some smart cryptocurrencies survive and grow to thrive, and that blockchain works its magic all around this little mote of dust called Earth, spinning in space, and forever changing. 

How To Cut Bitcoin's Energy Use By At Least 95%?

When does a Bitcoin demand most energy? The answer: during its creation. Bitcoin mining is energy intensive. Bitcoin mining creates new Bitcoins that users can then spend, save, or give to others.

To spend a Bitcoin or any of the 100 million parts that make up each Bitcoin, a Bitcoin transaction — or validation — must take place. However, the energy needed to validate each Bitcoin transaction is tiny. So once Bitcoin mining of each new Bitcoin is complete, Bitcoin energy use is minimal.

We know that at most only 21 million Bitcoins can exist.

As of February 24, 2021, 18.638 million bitcoins have been mined, which leaves 2.362 million yet to be introduced into circulation.


So most Bitcoins have already been mined.

Is There A Solution That Can Cut Bitcoin's Energy Use By At Least 95% Without Changing The 'Design' Of Bitcoin?

Most likely, yes. Here's one way:

Introduce a voluntary Bitcoin mining pause. Miners stop mining any more Bitcoins until every Bitcoin mine on Earth uses 100% green energy. Then, and only then, mine the remaining Bitcoins. Welcome to the great Bitcoin Mining Pause (BMP).

Will Bitcoin mining companies have the courage and foresight to save themselves through 'self-government' and self-management now?

Or will they wait, keep doing things the way they are now, until forced to change?

The short answer is: I'm guessing, they'll probably choose to keep on Bitcoin mining for as long as it is profitable for them. Here' why.

  • For a pause in Bitcoin mining to happen, Bitcoin miners will lose billions in currency. Bitcoin miners will want to make up their income in other ways. Yet, other than mining new Bitcoins and validating Bitcoin transactions, is there any other practical way for Bitcoin mining companies to exist? 
  • Income from validating Bitcoin transactions will be significantly less than what they can earn mining new Bitcoins.
  • Bitcoin miners, among others, have to agree to a pause. Unless they all agree to pause at the same time, I doubt any will.
  • Getting all Bitcoin mining companies to agree is probably almost impossible.
  • It's unlikely that any government will compensate Bitcoin miners for lost Bitcoin mining income during such a pause.

Yet, lowering global CO2 levels on a planet-wide scale is crucial going forward. So the G20 governments could all agree to work together to 'fix the Bitcoin's energy problem'. Maybe they won't wait: maybe they'll just act as a bloc. Thereby agree to impose new rules, regulations, incentives and punishments on Bitcoin mining. Comply, or else ...

Or, governments could give a free hand to those Bitcoin mining companies that can demonstrably prove they use 100% green energy. Regular, random spot checks with outrageous fines for failure will ensure compliance. Any other Bitcoin mining companies that do not meet the new 100% green energy standards could find themselves in a bad place.

Moreover, getting most Bitcoin mining operations out of China and into a few democratic 'open' countries makes Bitcoin mining 'management' much easier for governments who work together on Bitcoin issues.

Bitcoin and all other cryptocurrencies are constrained by laws and the forces of governments. Almost any and every large scale Bitcoin mine can be 'shut down' in minutes by anyone with the right 'tools'. No, I'm not going to explain how.

So unless Bitcoin miners can work out how to 'go green' at record speed, they could be in trouble. Most current large scale Bitcoin mining companies could disappear unless they evolve.

Yet during a Bitcoin mining pause, for Bitcoin users, Bitcoin itself can still continue to grow and thrive using 'transaction validators' only. Bitcoin investments, speculation, and currency works can continue as normal. Every Bitcoin already mined is still as valuable and as rare as it is from the moment of birth. Maybe even more so, for a while at least, since during a Bitcoin mining pause, every Bitcoin would become even rarer than it is today. Why: because no new Bitcoins would be minted during the Bitcoin Mining Pause.

All that would change is the act of creating new Bitcoins would cease for now. Yet if Bitcoin use continues to expand and Bitcoin prices continue to rise, more people using the Bitcoin network should increase transaction costs, and therefore, validation income for Bitcoin miners.

Moreover, Bitcoin miners who hold on to more of their Bitcoins would gain from rising Bitcoin prices. Perhaps these higher prices and increased transaction fees could compensate them for Bitcoin mining losses during the pause.

Who then could complain about Bitcoin's small energy usage? So in the highly unlikely event of a voluntary Bitcoin mining pause, maybe all's well that ends well after all.

One More Thought: Canada's Hydroelectric Power Miracle

There is simply no need for a Bitcoin mining pause. Perhaps the following paragraph makes a complete mockery of the entire fuss about energy used to mine new Bitcoins.

Canada generates a lot of hydroelectric power. We know that unused hydroelectric power is often simply wasted. Right now, the Bitcoin network requires 129 TWh of electricity. Canada's total current hydroelectric generation capacity is 400 TWh. So could Canada's spare, currently unused hydro-electric capacity power the entire Bitcoin network alone and still leave masses of power remaining for other uses? Read that again.

Electricity facts: Canada.

Important reminder: all that you may read above is for information entertainment purposes. None of what you may read above or elsewhere on this website is investment advice. You could lose any or all money you may invest in Bitcoin. Do your own research. Never invest in anything what you cannot afford to lose.

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