Why Bitcoin Has Value

Bitcoin is clearly the most controversial topic in financial markets today.  The rise in price of Bitcoin has been nothing short of astounding, as it flirts with $7500 per coin just a mere eight and a half years after it’s creation.  While many investors (Jamie Dimon) have lambasted it as nothing more than a phony mirage of bits and bytes masquerading as “currency,” there are an equal number who see it as a truly revolutionary investment in the future of money and trustworthiness in transactions.

One thing is certain: Bitcoin’s very existence has brought to the public a question that philosophical and economic eggheads have been discussing for centuries, if not millennia – what constitutes a currency?  Aristotle’s stipulations for the requirements of currency stated that it must be durable, portable, divisible, and possess intrinsic value.  Bitcoin clearly possesses the first three and the fourth one is the point of contention among critics.  Bitcoin, they say, has zero intrinsic value.  However, intrinsic value in and of itself is a very nebulous concept, as currency is different from human necessities such as water, food, and oxygen.  Currency does not need to be water, food, or oxygen, only a source of confidence in exchange.  The currency itself is simply a means to an end in the sense that it is a tool for barter.  Going one step deeper, critics argue that gold has value as a currency, but it also possesses intrinsic value in that it is a shiny and cool element.  However, purchases of gold unrelated to currency uses only make up about 3% of all transactions.  To say the gold price holds stability due to it’s value purely as an object of desire is overwhelmingly false.  97% of gold transactions are conducted because gold is a reliable source of monetary exchange value.

Here’s one more concept to understand: obviously Bitcoin is not widely used as a currency and it probably never will be.  While a very small fraction of companies actually accept it as payment, it is clearly too volatile to be widely used as an alternative payment.  Furthermore, all payments in Bitcoin are clearly converted back into dollars at some point in the future.  Once again, this is not really a concern.  Gold is clearly not an acceptable form of payment at almost all merchants and just like Bitcoin it must be converted back into taxable currency.  However, that does not stop us from buying it.  What gold provides is a safe haven of value for wary investors.  This is where we approach the fundamental truth about currency: currency is confidence.  If the fiat monetary system isn’t doing the job, something else will.  And if a currency has a fixed scarcity, which is a central tenant of Bitcoin’s existence, scarcity will drive up price for something that has an increasing demand.

So there you have it.  Bitcoin is valuable.  Is it a currency?  Kind of… more like a speculative currency.