Last updated on November 15th, 2021. Posted in Bitcoin Blockchain & Crypto.
Why is cryptocurrency worth anything? I mean, isn't it all just digital money? Well not quite. And in fact, there are some very profound aspects to bitcoin and other cryptocurrencies that make them very valuable...maybe even more valuable than the money in your bank account, or even gold! Let's take a look...
Here are links and resources mentioned in today's video. Enjoy!
A common objection to bitcoin and other cryptocurrencies is that it’s worthless because it's just digital money -- a file on a computer. In other words, it has no scarcity and can be easily duplicated.
But that's not how bitcoin works -- not at all, in fact! See, bitcoin is made possible by it's underlying technology called blockchain, which I'm sure you've heard of.
Now it's very easy to get confused and overwhelmed when we start digging into this stuff, so I'm going to keep things as simple and straightforward as I can.
Rather than bitcoins being digital files on computer hard drives, instead they're entries in a fully public, fully distributed online spreadsheet. And in fact, this spreadsheet has programming built into it...
...programming that says that there's a strict and limited supply of bitcoin, and other rules like, all other computers on the network have to agree to, be bound by, and uphold all the rules that are set out in the programming of the network.
So what gives bitcoin and other cryptocurrencies their value is the protocol -- the set of rules on the blockchain -- that limit their supply. But their value comes from somewhere else too: Network adoption.
That is, more and more people see the value in various cryptocurrency and blockchain projects and either want to contribute their programming, development, and entrepreneurial skills to it...
...or they could simply see the value in these networks and want to own a tiny piece of it. And of course, Economics 101 tells us what happens when there's strong demand for something that is limited in supply.
So this is why cryptocurrencies are valuable. All this said though, you might still be scratching your head going, "but bitcoin and other crypto isn't backed by anything!"
Well neither’s gold, is it? After all, it’s just a shiny yellow rock. Or what about your house? Isn’t that just a bunch of lumber and drywall?
Or how about a Mickey Mantle rookie card? It’s just a piece of cardstock with some ink on it. How about a $100 government note? That’s just a slip of fancy paper with ink on it, right?
So why are all these things valuable? Well there are two things give something value: Scarcity and demand. Or maybe said more accurately, scarcity and utility. Your house has value because of where it’s located and because of the function it serves — as shelter and to provide comfort.
What gives rookie cards value is demand from collectors. What gives government issued bank notes value is people’s belief in them.
Gold and bitcoin have value too because of their rarity and because of their economic utility — their ability to fulfill the five criteria of money. The free market has decided that they have value. Therefore, they’re valuable.
Gold and bitcoin (and anything else) don’t need to be “backed” by anything to have value other than the utility and function they serve.
Really think this stuff through...and I’ll bet you’ll reach similar conclusions as we’ve discussed here.