Why Does Bitcoin Have Value?
Value is the focal point of many discussions around Bitcoin, especially given the kind of price volatility this asset is subjected to. The value of a pioneering asset – if Bitcoin is taken to be an asset – is hard to establish. In many cases, this is not due to the virtues or drawbacks of the coin itself but rather a function of how we define value. In other words, when people discuss why does Bitcoin have value, what they are really doing is judging what the word value really means. Those who have studied business or finance, quickly conflate value with price. Others might conflate it with utility, asking how an asset that is not as widely used or accepted as the USD, for example, can actually hold any value.
These lines of thought are rife with conceptual shortcuts that cloud our judgement. Therefore, to anchor the conversation around Bitcoin’s value, it is necessary to define what value is before addressing Bitcoin at all. Here is a simple definition of what value is:
- The importance or worth that something has.
- Value is not price, and it is not utility.
- Price is an expression of transient collective sentiment about the value of an asset.
- Utility is an objective assessment on how useful that asset is to an individual.
Does Value Affect Price and Utility?
Therefore, value is a much more objective measure that might change if the fundamental aspects of the asset change. It is clear that for the people in Venezuela for example, an asset like Bitcoin has a much higher utility than for the people in the US, precisely because their economy is disintegrating, and the local currency is basically worthless. This doesn’t mean that Bitcoin is more valuable in Venezuela than it is in the US; it just means that Bitcoin’s utility in Venezuela is higher than it is in the US. As a result, Bitcoin prices in Venezuela might be higher than those in other places around the world.
So, Why Does Bitcoin Have Value Then?
Nevertheless, Bitcoin has the same value no matter where you are in the world; its virtues do not change depending on the location of the user or the vantage point of those who are constantly trying to assess its value. Differences in utility and price depend on the circumstances, users find themselves in. Venezuelans have no functional currency, little freedoms, and face ever-growing obstacles in their day to day lives. People who reside in the US are relatively free, work within a more functional economy, and generally don’t face daily challenges to their way of life.
Bitcoin offers the same objective virtues to people in the US as it does to people in Venezuela:
- An opportunity to engage in economic activity without the need of any intermediaries.
- The virtues of an asset that is underpinned by a decentralized and distributed network, which means it is not subject to censorship of any kind.
- Supply certainty, given that there are only 21 million coins, and everyone knows how they will enter the money supply.
- A deflationary option in a world of inflationary fiat currency that central banks create according to their own parameters.
This is Why Bitcoin has Value!
This means that people in the US who are worried about public debt, private debt, and the general ability of the economy to keep on working like it works today, will find utility in Bitcoin. That utility will be inferior to the kind Venezuelans facing shortages of virtually every good out there find in Bitcoin. Therefore, the price will change from Venezuela to the US. However, those people who buy and hold Bitcoin in the US might find that the utility they derive from Bitcoin will be greater in the future if the economy hits the skids. Therefore, they will buy and hold Bitcoin as a hedge, and enjoy its benefits insofar as freedom of speech and economic freedoms are concerned.
Assessing the Value of Bitcoin
That is why Bitcoin has value, and that value cannot be assessed properly by attaching a price to it. Bitcoin has value because of the aspects that make its network reliable, flexible, available to all at all times, and incontrollable. Some of these aspects can be measured, others can’t. So, the next time someone asks why Bitcoin has value, you will be able to point out the complexity in measuring value in general, and how in many aspects, Bitcoin is already more valuable than many other traditional assets.