Bitcoin’s price has been rising rapidly in the last few months and it now has a market cap of over $100 billion. One Bitcoin is currently worth $6500. But Why bitcoin is so expensive right now? What provides so much value to Bitcoin? In this article, I will try to explain what features provide value to bitcoin and what are its drawbacks.
What is Bitcoin and Its History
Bitcoin is a decentralized peer to peer currency. It works using the technology known as blockchain which keeps the records of all the transactions done using bitcoin. Bitcoin was launched in 2009 via an anonymous person named Satoshi Nakamoto who disappeared in 2010.
Bitcoin has a limited supply of 21 million bitcoin. People get bitcoin by solving cryptographic puzzles on their machines and finding a block which helps in validation of transactions of other people. This is also known as mining. The distribution of the bitcoin supply is done via mining which currently gives 12.5 bitcoin to the person who solves the cryptographic puzzle and finds a block. This block reward halves every 4 year which limits the supply of bitcoin to 21 million bitcoin.
Why Bitcoin Is So Expensive
To understand why bitcoin is so expensive, you have to understand how gold and world currencies work and what gives them value.
Bitcoin as a store of value
Gold is a scarce element that is available only in limited amount in the world. It is easier to carry and store than other liquid and gaseous elements. It does not rust so you don’t have to worry about it going to waste. It is easier to verify the authenticity of Gold than other elements but it is still difficult to verify it for normal people. Silver has similar properties to gold which is why it is valuable too. But both Gold and Silver has a risk of becoming invaluable if someone discovers a way of creating artificial gold in the future.
Read more about why gold is valuable here.
Similar to Gold, Bitcoin has a limited supply which can not be increased. Bitcoin is much more easier to carry than gold since it is controlled using keys which can be written on a piece of paper or stored in digital devices. Since bitcoin uses blockchain, it is much easier to verify its authenticity than Gold and Bitcoins do not expire so you don’t have worry about it being wasted away. Since the supply of Bitcoin is controlled using math, bitcoin do not carry the risk of becoming invaluable in future because no one can create new bitcoin other than the underlying code itself. Since Bitcoin satisfies every criteria of being a digital version of Gold, it is called as Gold 2.0 and it presents a better store of value proposition than gold.
Bitcoin as a currency
Most of the currencies in the world are backed by Gold and Dollar reserves. Since Gold can not be verified by day to day people, they use currency notes issued by the government. The currency notes do not have a value of their own but they are backed by government reserves. Since the people trust their governments, they trust the currency that is being handed over to them.
Currencies have a lot of drawbacks. Every year, the governments introduce new supply into the markets to satisfy the increase in demand of the currency. This is also known as Inflation. Whenever an inflation takes place, the value of the currency decreases since the amount of government reserves remain same. This makes doing savings in the currency less lucrative which drives investors away. The currency notes are also prone to wear and tear and need to be cancelled and reissued every few years. Since different countries use different currencies, you need to convert your currency into the other country’s currency if you want to use it there.
Since, Bitcoin is easy to verify, it eliminates the purpose of currency notes on top of bitcoin. Instead people can use bitcoin in day to day life. Bitcoin has a controlled inflation rate which prevents it from hyperinflation. Also, it is much easier to carry large of bitcoin than carrying a large amount of a particular currency.
Drawbacks of Bitcoin
- Since bitcoin is governed by code and cryptography, it has a risk of breaking down if the underline code or cryptography contains a bug that has not been discovered yet.
- It is very difficult to securely store bitcoin due to the number of hacks and computer viruses.
- People in the world might not be educated enough to understand how to use bitcoin. It is difficult to understand. This makes adoption difficult.
- Bitcoin currently is not scalable enough to become a digital currency as it currently processes only 6-10 transaction per sec which is not nearly enough to enable people to do day to day transactions.
- Since bitcoin is digital, it needs electricity to perform transactions which might not be available during blackouts etc.
Bitcoin is trying its best to overcome its drawbacks and is currently trying to solve its scalability issues. While bitcoin is still far away from being a digital currency, it still fits the criteria of being the digital gold which gives it value today.
Let us know how you feel why bitcoin is so expensive and what gives bitcoin its value in the comments below.