Where does the value of a Bitcoin comes from?

By | January 13, 2017

Before we get started, let me begin with a little story.

In Mach, 2011, a grocery store in Bowie, Maryland, reported that it had been robbed multiple times. But the curious thing here was what was being robbed every time: detergent. And one specific brand: Tide.

After this made the news, it opened the floodgates. Tide was not just being stolen from that grocery store, but every store was losing copious amounts of the detergent. And then the story went national. This was happening everywhere in the US.

Long story short, Tide detergent has become a black-market currency in the drug trade. Drug addicts we were taking it from everywhere, and exchanging it for drugs. Who knows how long has that been happening. I mean, who is going to call the police to report that some bottles of Tide were stolen?

To understand how is this even possible, we need to go a little into the nature of money itself, and from this you will see how is Bitcoin possible and useful.

How we trade what we do among each other?

We grew in a world where all trade has been in the hands of our respective governments, and this is what we see natural. We pay X amount of money for milk, because it was decided that the milk has that value, and we just accepted it without questioning it. There is always inflation, and there are devaluations, money simply loses its value over time. Now you have to work longer to buy the same amount of milk.

Why do we value this paper more than we value our time?

Lets face it: You are waking up every day and putting out hours of your time and your best skills, in order to get a piece of paper or in order to see a number increase somewhere.

Why?

Because you can transfer that piece of paper or that number to someone else who wants it in exchange for what you need or want.

And why do they accept it?

For the same reason you do: you see it as having value because everybody agrees that it has value. It’s nothing, but it has value.

It isn’t just money that you perceive as having value. If I offered you a significant amount of gold for a pencil, wouldn’t you take it? Maybe I need that pen to sign a deal that will save someone’s life, so for me the pen becomes more valuable than the gold I am offering to you, and for you the gold is more valuable than that pen, so we have a deal. As in the story with which I began, some people would give me the pen for a bottle of Tide.

What about one Bitcoin for that pen? Would you take it?

The money is nothing more that a tool to exchange two different things that are not necessarily connected. I am not a gold miner and you are not a pen manufacturer. I do not know what you do, you do not know what I do, and our skills could be useless for one another.

But I need to eat, and maybe what I do, or what I have, are of no use to you. But you have the food. How do I get the food then? I use my skills to do something for someone who needs me, and he gives me something that you need, so I can exchange that with you for the food.

This is where money comes in, because there are too many different skills, to many different needs, and we need to be able to trade. So we agree on the value of money, and we use it to trade.

All the money these days is “Fiat Money”

The money that we have these days is called “Fiat Money”. It has value because the government said that it has value, and if the government says one day that it has less value, then it has less value. But given how the economy is now global, some times the government is not in control of it, simply the currency of the whole country is seen as less valuable, so the whole country losses. Things don’t lose the value, but the currency that you use does, so you have to give more of it to get the same you used to get. Money is not back up in gold or in any other thing, it is nothing.

Bitcoin and the rest of the cryptocurrencies are a disruptive technology. With this I mean that they being here changes how things function. A Bitcoin also has value because people perceive it as having value, so they exchange them for other things of value for them, like we use any other currency.

There is only a limited amount of Bitcoins. Unlike the currencies of the countries, one can not simply print a lot of new Bitcoins, nobody has that power. Just like gold, someone can not just “create” new gold, it has to be mined out of the ground.

But Bitcoins are more practical for trading than gold is: it is virtual, and it is not bound by borders. No matter where you are reading this from, if you have a Bitcoin address, I can transfer Bitcoins (or small fractions of a Bitcoin) to it.

In conclusion, Bitcoin is no more than a tool for trading. It has value as long as people perceive them as having value. But it is not backed by a government, or by a physical thing. If you want a Bitcoin, is because you think that you can exchange it for something else you need or want, and you believe whoever you offer that Bitcoin to will accept it as payment.

It is becoming more and more mainstream, now you can even buy plane tickets with Bitcoins, pay in some restaurants, buy gift cards to different places.