Bitcoin is a type of virtual currency that uses cryptography (a mathematical system) to perform transactions and create additional units of bitcoin. But what backs bitcoin?
For one, it is not supported by physical assets. But then, that doesn’t necessarily mean that bitcoin doesn’t have any value. In fact, Bitcoin now ranks among the most valuable digital currencies all over the world. The current price of Bitcoin (compared to when it first started) also speaks for itself.
Bitcoin (BTC) Vs. Fiat Money
The story of bitcoin began in 2008 when Satoshi Nakamoto invented it. A digital version of physical money (legal tender), bitcoin allows individuals to transfer money online peer to peer (without intermediaries like banks). Bitcoin is decentralized - it has no central authority. The bitcoin transactions happen between bitcoin miners who use computers to confirm and record transactions of digital assets in a public ledger called the blockchain.
At present, more than 100 billion dollars (USD) worth of bitcoins has been mined. While some economists believe bitcoin is merely an unregulated form of currency (e.g. dollars, euros, etc.), others claim that it provides the ability to escape the control of governments and financial institutions such as Comerica Incorporated (NYSE: CMA) and Capital One Financial Corporation (NYSE: COF).
How is Bitcoin Backed by Mathematics?
Bitcoin is frequently considered devoid of intrinsic value as a medium of exchange since there's nothing to support it. However, Bitcoin is backed by something far more complex than math - cryptography.
Cryptography is the art of making information inaccessible to people who can interpret it. Anyone who tries to control the algorithm attempts to control the data stored on the blockchain. This feat is impossible to do without breaking the encryption method used to store information in the Bitcoin blockchain.
This is what makes Bitcoin distinct from fiat currencies that are supported by central banks and governments. Fiat money is built on trust, meaning they are easily manipulable by a government. On the other hand, bitcoin’s value relies on cryptography and validation to protect its authenticity.
Bitcoin mining is a remarkable invention - and while it may seem odd to think the concept of digital currencies can have merit, it's important to remember that people have to pay billions of dollars to buy expensive assets like houses, cars, etc., with just number codes from credit cards (and a bank account, of course).
The Valuation of BTC
Bitcoin is commonly referred to as digital gold. While there are some similarities between them (such as scarcity), there are some key differences as well. For one, gold is utilized as a currency, while bitcoin is primarily used as a method to transfer money using a cryptocurrency exchange like Coinbase (NASDAQ: COIN).
People tend to purchase gold because they believe that it will last for a long time. However, Bitcoin isn't like gold in that way - its store of value/market value is determined by speculation on whether it will be successful as a cryptocurrency or payment system (which explains the bitcoin price’s volatility). It’s also worth noting that BTC has the largest market capitalization as compared to other cryptocurrencies in the crypto market.
Why Some People Believe Bitcoins Are Worthless
The Bitcoin network is decentralized, nobody has control over it. This makes it hard for anyone to influence the market since the Bitcoin network isn't regulated by any central entity. This also means there is no authority to oversee what happens on the market.
Because of the scenario above, a lot of people believe that the value of these digital currencies (bitcoin/btc, ethereum/eth, dogecoin/doge, etc.) aren't worth much since nothing truly backs Bitcoin and that the whole cryptocurrency value is based on speculation. However, there are people who understand that these digital assets are not a scam.
So, What Backs Bitcoin? And Does it Really Matter?
BTC is the top cryptocurrency globally, but it's not supported by assets such as silver, gold, or precious metals. Actually, there are no physical bitcoins held by any person. Instead, Bitcoins are created through computers that solve mathematical equations.
The absence of reserves is what makes Bitcoin distinct from government-issued fiat currencies like the euro or U.S. dollar. While many believe that this implies that Bitcoin has no value, it’s simply not true.
When you use Bitcoin (BTC) as a payment method, you give the computer power through the blockchain technology to fulfill the transaction. This proves that Bitcoin has value and purchasing power even if it’s not backed by physical assets.
Related: AAPL: Will Apple Stock Continue to Beat the Market In 2023 and Beyond?