Here’s why Bitcoin has value — my two cents (get it? 😎)
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The best part? I know just enough to be dangerous.
Wish me luck.
For people who say “Bitcoin is backed by nothing,” hear me out: it’s backed by its own characteristics. And that’s what gives it value.
Wait, what?
Let’s think about a basketball player. For someone to be good at basketball, they ideally have certain characteristics. Namely:
✅Athletic
✅Good jump shot
✅Good ball handling skills
✅Etc. (you get the idea)
That person is “valuable” as a basketball player because they have those characteristics.
For something to be used as MONEY, it also needs to have certain characteristics. But what are they?
For example, dollars bills and blades of grass are both green and I can count them. So why can I pay for stuff with one but not the other?
It’s because grass is lacking a ton of the other characteristics that make sound money, namely:
➡️Medium of Exchange — money is just an abstract representation of our time and labor so that we can all specialize in certain things and pay everyone else for their specialty in other things.
➡️Countable — we need some way to set a relative price.
➡️Portable — easy to carry around. Gold is heavy. Digital is weightless.
➡️Durable — hard to breakdown or destroy. You can rip a dollar bill, melt gold. Bitcoin lives on the Internet.
➡️Divisible — the ability to make change. Dollars have quarters, pennies, etc. Each BTC has 100 million parts.
➡️Recognizable — hard to counterfeit. Dollars & gold can be counterfeited. BTC can’t.
➡️Fungible — a unit in my pocket is worth the same as a unit in your pocket (dollar, quarter, etc.).
➡️Scarcity — a limited supply. Cue inflation/deflation conversation here.
➡️Faith — people (and laws) have to get behind it. This is where BTC struggles like no other.
So, in my OPINION, I think BTC has “value” because I believe it is very strong in those characteristics. It doesn’t need to be “backed” by anything other than its own qualities.
That’s my academic view, and it’s good enough for me to roll the dice and take the ride (not financial advice).
That said…
In reality, it’s much different — “sToRE oF vAluE” is all over the place, and I think a lot of this has to do with the last characteristic, FAITH.
For as many die hard HODLers there are, there is an equal number of haters. And it’s hard to value new, digital, DEflationary money with existing INflationary money. Throw in small retail positions and a lot of emotion-based trading and MAYBE just MAYBE that’s why we have crazy price swings.
The truth is — I don’t know. At all.
Those are just my two… satoshis...👍
About Me -- I'm Chris -- I help finance professionals build awesome FP&A and Private Equity Models in a simple and relatable style.
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Until next time.
—Chris