Where does the value of Bitcoin come from?

[Fugger]

Hi everyone,

we tend to think a lot about the price of Bitcoin expressed in fiat currencies. In that case we look at Bitcoin as an asset. I would like to look at Bitcoin as a currency. Where does a currency derive its value from?

In order for a good or commodity to serve as a currency most textbooks say it has to have three properties, it needs to serve as

1. a store of value
2. a calculation metric
3. a medium of exchange

I think 2. and 3. are the more obvious points. Bitcoin, like other currencies is divisible and are therefore of good use if you want to count or calculate something. Also, Bitcoin like other currencies, can be transferred electronically which makes it a good medium of exchange. Even a far superior one because the transfer of Bitcoin is MUCH faster and cheaper than for fiat currencies.

3. is a bit more tricky. A currency is only a store of value as long as it is accepted as a means of payment. If nobody accepts your Bitcoins when you want to buy shoes ar anything else, it does not fulfill this function. So a currency can only be a store of value, as long as there are other parties who do accept it. The USD or the EUR are used because we believe that when I have EUR today someone will accept EUR tomorrow when I want to buy something for it. Therefore I TRUST this currency. An inherent value as a commodity (as with gold) is not necessary because it does not hurt its use.

So my hypothesis is that the real value of Bitcoin comes from its acceptance as a currency by many mechants and individuals. Its value will increase (and with it its exchange rate to other currencies) the more people and businesses actually use it as a means of payment. If we all want Bitcoin to succeed, we need to use it in everyday transactions and not primarily for speculation. The value is driven by demand. The value of a currency comes from people using it because that increases demand.

Tell me what you think about this.

[JohanS]

I believe that you are right.

Bitcoin has to be more widely accepted in order to succeed.

The value right now is only that it can be used in suspicious deals where i don´t wish to tell the banks (and by that the authorities) what i should use the money for, and who i give the money to. And of cause there is a speculative value in BTC.

As BTC cannot be created in the same way as fx USD, which is created every time a bank grant a loan, an increased number of transactions will increase the value of BTC.

 

[marcus_of_augustus]

The value right now is only that it can be used in suspicious deals where i don´t wish to tell the banks (and by that the authorities) what i should use the money for, and who i give the money to. And of cause there is a speculative value in BTC.

As BTC cannot be created in the same way as fx USD, which is created every time a bank grant a loan, an increased number of transactions will increase the value of BTC.

All transactions are now treated as 'suspicious deals' by authorities (and banks) by default. It is the doctrine of presumption of guilt that was embraced implicitly by the West recently when it rejected presumption of innocence.

So Bitcoin has major value for the foreseeable future based on your premises (although they are weak, limited and mostly contrived it seems).

[Fugger]

In some countries it is simply treated as a different currency which I think is good. And I believe that Bitcoin will increase its acceptance even by authorities when they see many people using it.

[bitcoin_max]

It has to get easier to use.

[Fugger]

It has to get easier to use.

Do you mean Bitcoin itself?

[johnyj]

So my hypothesis is that the real value of Bitcoin comes from its acceptance as a currency by many mechants and individuals. Its value will increase (and with it its exchange rate to other currencies) the more people and businesses actually use it as a means of payment. If we all want Bitcoin to succeed, we need to use it in everyday transactions and not primarily for speculation. The value is driven by demand. The value of a currency comes from people using it because that increases demand.

Tell me what you think about this.

I have different view

Money's value is not mainly decided by supply and demand. Trust is the most important factor. Gold is not accepted as a payment medium by many merchants and individuals (impossible to buy something from a supermarket with a gold bar), but it still holds value. Because those value are generated from several unique properties (never deteriorate, divisible, scarce, easy to transfer, mass acceptance) and people all over the world has reached a consensus that gold is trustworthy to present value. From a scientific and industry point of view, gold really worth a little, but it holds its value due to that consensus

Even lots of people use bitcoin to do payments, the value of bitcoin will not increase, as long as there are other medium of transaction available. If there is a shortage of bitcoin, people will start to use USD/EURO/CNY etc... they can even do barter over internet and directly exchange goods/services, demand do not affect the price of a currency, trust do, and it takes time to build up trust

[Fugger]

So my hypothesis is that the real value of Bitcoin comes from its acceptance as a currency by many mechants and individuals. Its value will increase (and with it its exchange rate to other currencies) the more people and businesses actually use it as a means of payment. If we all want Bitcoin to succeed, we need to use it in everyday transactions and not primarily for speculation. The value is driven by demand. The value of a currency comes from people using it because that increases demand.

Tell me what you think about this.

I have different view

Money's value is not mainly decided by supply and demand. Trust is the most important factor. Gold is not accepted as a payment medium by many merchants and individuals (impossible to buying something from a supermarket with a gold bar), but it still holds value. Because those value are generated from several unique properties (never deteriorate, divisible, scarce, easy to transfer, mass acceptance) and people all over the world has reached a consensus that gold is trustworthy to present value. From a scientific and industry point of view, gold really worth a little, but it holds its value due to that consensus

Even lots of people use bitcoin to do payments, the value of bitcoin will not increase, as long as there are other medium of transaction available. If there is a shortage of bitcoin, people will start to use USD/EURO/CNY etc... they can even do barter over internet and directly exchange goods/services, demand do not affect the price of a currency, trust do, and it takes time to build up trust

I agree that trust is a crucial factor. Maybe it's just a question of perspective. Trust can drive demand if other alternatives lose trust and there is a shift from one currency to another. How is trust created? You mentioned mass acceptance for gold as one property. I think it could be one driver for Bitcoin, too and we're not that far away from each other.

[johnyj]

I agree that trust is a crucial factor. Maybe it's just a question of perspective. Trust can drive demand if other alternatives lose trust and there is a shift from one currency to another. How is trust created? You mentioned mass acceptance for gold as one property. I think it could be one driver for Bitcoin, too and we're not that far away from each other.

True, mass acceptance will increase the trust for bitcoin

I think the biggest consensus of bitcoin's value comes from the limited supply of total amount of coins. This ensured that your bitcoin holding will not be inflated by central bank like they did with fiat money, and bitcoin will be able to hold the value long term wise