What Makes Bitcoin Valuable?

At this point, almost everyone has heard of Bitcoin. Whether it be from the “Rags to Riches” stories they’ve seen in the news, hearing about people losing millions of dollars’ worth of it when they threw away their old computers, seeing politicians claiming that Bitcoin mining is destroying the Earth, or maybe a family member was trying to get you to buy some over Thanksgiving dinner. No matter how anyone first found out about the father of all cryptocurrencies, they probably did not fully understand what makes Bitcoin valuable enough to garner this much global attention & recognition in the first place.

This isn’t because people aren’t capable of understanding Bitcoin, its concept is actually quite simple, but rather because the most popular stories that we hear typically focus on either Bitcoin’s price action, or some politically charged stance around it. That’s because those topics get “clicks” and views, but these headlines wouldn’t exist if Bitcoin didn’t have any real-world utility to act as a foundation for things like its meteoric price rise to take place.?

Source: www.tradingview.com

This article is an abbreviated attempt to explain why Bitcoin is valuable as a global currency, why it’s a replacement for gold as the best store of value, and why it’s “better” than other cryptocurrencies when it comes to these specific categories. All of which are the reasons behind why Bitcoin has become a household name today.

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Is Bitcoin a valuable currency?

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???????????Yes it is. In fact, for a global economy that is becoming more and more internationally connected every year, I’d say it’s the best form of money that we’ve ever had.

If you’ve ever tried to send money internationally through a traditional banking system, you’ll already know how annoying of a process it can be with wire transfer fees, expedition fees if added, margin fees for exchange rate conversions, and the fees that the recipient might have to pay on the other end just to receive the funds. All of which typically cost between $35-$50 and can take 1-3 business days. In comparison, it takes only 10 minutes to send Bitcoin to any part of the world and typically costs between $1 - $2, but this can vary & has been more expensive in the past, so you can see what the average transaction cost today is right here. These cheaper fees and faster speeds are possible because BTC is an entirely peer-to-peer payment system that doesn’t involve any middlemen.

Here’s a real-world example of the potential savings: 2,899 BTC were moved in 2018, which was worth approximately $194M at the time, for a total fee of $0.10…That’s UNREAL when you realize that moving just $1M through a bank typically costs over $10k (link here) and becomes even more mind-boggling when you realize that 2,899 BTC today is worth over $1.3B.

Now, most people aren’t moving large sums of money around, but for the average joe paying $2 is definitely better than paying $50 particularly for international workers sending remittance payments back to their families in their home countries. These fees represent a much larger percentage of their paycheck and Bitcoin could help make sure that more of their money is going to support their loved ones as opposed to bankers. Combing the estimation from Global Newswire that the global remittance market is going to more than double to $42B by 2028, with the growing adoption of the Bitcoin Lightning Network which is a scaling solution for BTC payments that increases transaction speeds & is free of fees, means that Bitcoin should see higher adoption rates in the years to come through its superiority within international commerce.?

That’s why I believe that Bitcoin is the perfect currency for both the common man/woman who works internationally and for wealthy individuals or companies who need to move large sums of money, but it’s not it’s utility as an international form of payment that we hear financial experts rave about in the US. Instead, it’s the claim that Bitcoin is a better store of value than gold.

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How & why Is Bitcoin better than gold?

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???????????Before we dive into this topic, we need to first review what makes something a good store of value in the first place.

A store of value (SOV) is an asset that retains its purchasing power, can be saved/stored, exchanged, and retrieved even after many years have passed. The most common forms of SOVs throughout history have been precious metals, with gold being the de facto king for centuries across the globe as it has fit this mold the best out of any other asset on Earth. This is mainly due to its scarcity, which enables it to retain, or increase its purchasing power over time when paired against our native currencies which can suffer from high rates of inflation or even be completely replaced. Gold has been a constant financial safe haven throughout most, if not all, of recorded human history, so how could Bitcoin be better?

There are several reasons as to why Bitcoin is a better SOV, but the most important reason is it’s even more scarce than Gold. Bitcoin has an annual supply rate increase of 1.77% as compared to gold’s 2.7%. This technically makes both gold and Bitcoin inflationary assets, but it also means that Bitcoin is the least inflationary asset in the world which used to be gold’s most important characteristic for retaining purchasing power. Now that title belongs to Bitcoin which has a limited supply of 21 million BTC and an annual issuance of new Bitcoin that is cut in half every four years in an event called “The Halving”. You can even argue that Bitcoin is, or at least will be, a deflationary asset one day as an estimated 20% of its total supply has already been “lost” forever in cold storage wallets that are no longer accessible. Also, it’s annual supply rate will eventually hit 0% sometime near the year 2140 when the final Bitcoin is mined. Since people will still be people in 2140, they will probably continue to “lose” Bitcoins, which when combined with no new BTC being mined, would make it deflationary as the total supply on the market would be decreasing.

This “losing” of Bitcoin is a bit of a concern though when making the argument that BTC is a good store of value as one of the criteria for SOVs is being retrievable/accessible, so let’s address this.

Bitcoin lives on a blockchain, which you can simply think of as a very large & secure database that can be viewed by anyone with connection to the internet and that provides the ability to see where every single Bitcoin that has ever been mined exists. How a Bitcoin becomes “lost” is when someone loses the ability to open their digital wallet where their Bitcoin is stored, which usually happens when people forget their password & subsequent recovery phrases, or the owner passes away & never shared their login info with anyone. If the login info is stored & kept securely, then accessing, retrieving, sending and exchanging your Bitcoin is an amazingly easy process that can be done on your phone. Far easier than having to move physical gold bullion around, along with being way cheaper to transport and far easier to find a buyer. It just requires more personal responsibility as there is no 3rd party service provider to bail you out in case you make a mistake, and mistakes are permanent on the blockchain.

The only area where gold beats, and will always beat, Bitcoin is in its longevity. It has been a store of value for centuries & is an asset that has earned our trust, whereas Bitcoin has only existed for 13 years; however, the only way that Bitcoin stops existing is if the internet were to collapse. If the internet were to collapse, then that means that Humanity is probably being faced with an extinction level event and no longer concerned with monetary policy & finances. This leads me to push gold’s longevity to the side in this argument, as bitcoin is going to be around for as long as humanity continues to use & develop digital technologies, which I imagine means that Bitcoin will be around for as long we are.

The last thing to discuss on this topic of SOVs is to look at how these assets have actually performed when it comes to, well, storing value. For this comparison I’ll be using pricing data going back as far as September 2011 so that we can analyze both assets over the span of a full decade.

From 9/1/11 to 2/8/22 gold has increased by 12% whereas Bitcoin has increased by 585,215%, and on average gold has a rate of return of 2.3% whereas Bitcoin has a mean annual rate of return of 94.4% (I used mean because the average rate of return is over 7,000% and I didn’t want to beat up on gold too badly). Despite Bitcoin’s tendency to fall 70-80% during bear markets, it’s up swings are so aggressive as to be able to overcome these down swings and mark Bitcoin as the clear winner against gold when it comes to actually storing value.

Source: Messari.io

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Why is Bitcoin better than other cryptocurrencies?

This might be the most hotly debated part of this entire article, particularly for those you whom are already “in crypto” and a part of the community like myself. So, for those folk, let me first address that I am not a Bitcoin maximalist as I believe other cryptos do hold immense value, I am fully aware that there are other cryptocurrencies that have faster transactions speeds, cheaper fees, are more ecologically friendly and inherently deflationary. But even with all of that, I do believe that Bitcoin is better suited to being a global currency and the de facto SOV for the world due to its unquestionable and unbreakable security & reliability.

Bitcoin is the largest Proof-of-Work blockchain in the world, making it without a doubt the most secure database to have ever existed. It is also completely decentralized making it impossible for any one country or company to ban it, and it’s a public ledger meaning that all transactions are viewable & accessible which can put a hamper on money laundering and other types of fraud. No other crypto has this combination of characteristics to this extent. BTC is the most secure, reliable, and transparent crypto out there which is why I place it above the rest when it comes to being a global currency and SOV. Lastly, if you’d like to learn more about the advantages & disadvantages that Proof-of-Work blockchains have over some of the other methods out there like Proof-of-Stake, then I’d direct you to the debate between Lyn Alden and Justin Drake, which you can find here.

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Quick disclaimer

???????????In case it wasn’t obvious, I own Bitcoin and a host of other cryptocurrencies, so I am definitely financially incentivized to say positive things about these assets and want you to be aware of my potential biases even though I tried my best to center this article purely around facts. But the reason why I’m so bullish on this space is because I truly believe that this is the future of finance and represents the greatest financial opportunity of my lifetime. I simply want to help spread my knowledge of crypto to other financially curious people in the hopes that it sparks some interest in learning more about this amazing new space & tech…also I am not a professional financial adviser, and this is not professional financial advice ??.?