Bitcoin (BTC) was launched by pseudonymous founder Satoshi Nakamoto in 2009, laying the foundation for all other cryptocurrencies. It entered the open exchanges in 2010, and its value was $0.0008––orders of magnitude cheaper than a single penny. In 2011, Bitcoin hit its first significant pricing milestone when each coin reached a dollar in value. Fast forward a few years, and there were thousands of competing cryptocurrencies. One bitcoin was worth nearly $20,000.
Now, one bitcoin is worth approximately $21,000 (at the time of writing), down from a high of nearly $68,000 in November 2021. And that's the first thing to know about Bitcoin or any cryptocurrency: They’re susceptible to fluctuations on a daily basis, sometimes even by double-digit percentage points.
An asset's rarity defines its value. Before we discuss what a bitcoin is worth, let's talk about traditionally "valuable" investments, like gold.
A recent Reuters report broke the news that Uganda discovered a vast gold ore supply—31 million metric tons, to be precise. Gold has historically been one of the world's most valuable assets. However, an extra 31 million metric tons under Ugandan soil drives the global gold supply. If you’re wondering how this discovery is related to the price of bitcoin or how a relatively new digital currency can compete with a historically valuable asset like gold, we’ve got the answer: Rarity. More gold means this rare asset is now a little less rare and more readily available, and this can potentially result in a reduction in gold’s price, making it less valuable.
This is precisely what gives bitcoin their value. Due to Bitcoin's 21-million global supply cap, miners will never be able to mine more coins after they hit the limit. Bitcoin miners don't have to worry about finding a surprise blockchain supply in Ugandan soil. Instead, availability is fixed and absolute, meaning we’ll always be sure of its scarcity. This absolute, programmable scarcity is impossible to censor or take away without force and is easily portable and divisible by more than a dollar.
Additionally, it’s sufficiently decentralized, so no individual or group can rewrite its rules. It will likely exist forever with the same supply equation we can predict today, which is why it has value. This is Bitcoin's legacy.
However, recently, Bitcoin's big break came through when its price shot up within a year from around $570 (2016) to approximately $4,760 (2017). As an alternative to traditional financial methods, Bitcoin earned a reputation as a decentralized asset that could affect the world's economy.
Let’s look at a few characteristics that define Bitcoin’s valuation.
In essence, currencies have two fundamental uses: A store of value (which means the currency or asset maintains its worth over time) and a form of monetary exchange. The rapid emergence of cryptocurrencies like Bitcoin has prompted concerns about whether traditional currencies will remain the primary exchange form.
Bitcoin was the world's first cryptocurrency and is now the largest by market capitalization. Cryptocurrencies are digital money that, unlike government-issued fiat currencies like the U.S. dollar, aren't governed by any central authority or intermediary. Instead, cryptocurrencies exist on a decentralized network using blockchain technology.
Historically, many cultures employed precious metals like gold, silver, and bronze due to their long shelf life and intrinsic value. Traditionally, assets like gold derived intrinsic value from their extraction process, cost, and physical properties like luster and purity.
Current government-issued currencies frequently take the shape of paper money, which lacks the inherent scarcity of gold or silver. Government-backed currencies are fiat currencies issued by a central bank or any other government-approved authority. Governments constantly print fiat money, and many currencies collapse at some point. However, some people believe cryptocurrencies like Bitcoin will survive forever and hold their value. Bitcoin’s intrinsic value comes from its scarcity, so you could say its capped supply makes it an excellent long-term store of value.
Every fiat currency has died or inflated away to nothing, but Bitcoin is more likely to live forever! Not that this is at all a certainty.
Bitcoin is an exceptionally volatile asset, which means that investors must be willing to tolerate large swings. It’s also an unknown and risky asset. Depending on one’s thesis of the future, it may be 1,000x in value or go to zero. This means that investors who choose to invest in Bitcoin must be willing to take a large amount of risk. Additionally, its status is subject to change regularly.
All of this points to Bitcoin being a risky asset that investors should only invest an amount that they’re comfortable with losing.
It’s essential to keep in mind Bitcoin’s decentralized nature. Nobody owns the Bitcoin network. All Bitcoin users worldwide have power over the cryptocurrency. Bitcoin stays operationally sound due to its users' collective consensus, incentivizing them to protect and keep it secure.
Skeptics argue that Bitcoin holds no intrinsic value, unlike gold or other precious metals. Some argue that paper bills have intrinsic value since people can write on them or use them as kindling. However, Uganda’s 31-million metric ton discovery shows us that even gold’s intrinsic value can drop. As for dollar bills, the Federal Reserve estimates that it costs around 17 cents to print a $100 note.
Others such as Bill Gates have stated the value of Bitcoin is only proportional to the amount “the greater fool” is willing to pay for it down the road. This is true, but also true for other assets whose value is more than their physical value such as stocks.
It can be challenging to understand a cryptocurrency's worth. However, as discussed, most businesses, financial institutions, and the internet are built on digital trust. The same logic goes for cryptocurrency, along with its scarcity and store of value.