Anyone who questions the reasons for Bitcoin’s phenomenal rise can learn a great deal about money and subjective value. Why Bitcoin is valuable.
1. Bitcoin has no intrinsic value – luck!
Especially from the Gold Group it sounds at regular intervals: Bitcoin has no use as a consumer good and therefore is unsuitable as a means of funding. Only when a good has proven its usefulness, for example, in jewelery production, can it turn into a financial resource. But this line of argument fails both in empiricism and in the induction problem. Why should fiat currencies like the US dollar or the euro have value? Just because gold is also used for jewelry does not mean that all funds have a similar career path.
No, an intrinsic value (if that exists) is not a requirement for good money . In fact, a potential benefit outside the monetary sphere is even a hindrance. Because the use of money as a consumer good (think of the use of gold in electronics) distorts the price of goods through disruptions in the respective industries. As a result, gold would sometimes be exposed to the market fluctuations of commodities and industries in which it is used – not a particularly good argument for a monetary asset that should be as stable as possible.
Going to Bitcoin brings along all the features that good money requires. It is divisible, scarce, can be exchanged instantaneously and is, moreover, completely decentralized and therefore independent of censorship and inflation. For example, Bitcoin has accumulated more value than most have thought possible – without any “intrinsic value.”
Bitcoin’s cap at 21 million units is unique. There is no comparable commodity worldwide that is demonstrably as rare as Bitcoin. Who buys a certain amount of BTC, knows at any time, how much of the total supply he calls his own. This scarcity is Bitcoin’s ultimate value proposition – and a good reason why people attribute value to digital gold.
3. Inflationary fiat currencies
Of course, Bitcoin is far from being a medium of exchange as well as a processing unit. This is shown by the fact that we still measure BTC in its equivalent to the US dollar. How we measure the value of cryptocurrency # 1, however, is always in the eye of the beholder, as a glance at the exchange rate Bitcoin and Argentine peso reveals.
From the point of view of the Argentinians, even an investment during the all-time high would have been worthwhile. High inflation rates may therefore be the best argument for a Bitcoin investment. After all, even stable fiat currencies such as the US dollar are subject to some devaluation.
4. Bitcoin has all the features that needs good money
Money makes up half of every transaction. A good form of money is therefore essential for an efficient economy. For a good to be suitable as a monetary medium, it must have certain properties. So it should be scarce, divisible, fungible, non-consumable (money must be reusable) and forgery-proof. All these features make Bitcoin more powerful than any other media ever.
The more people recognize these qualities of Bitcoin, the higher the perceived benefit – and the higher the price.
5. Bitcoin’s incentive structure attracts investment
The fact that the Reward Halving takes place every four years, is chosen more or less arbitrarily. Satoshi could instead have chosen a slightly less drastic disinflation rate. However, economic supply shocks such as these regularly cause a severe shortage of the circulating supply.
That may be the reason for Bitcoin’s cyclical growth. Because according to the stock-to-flow model, the mere expectation of a shortage of supply in the run-up to halving causes market participants to accumulate coins.