Why Does Bitcoin Have Value?
Finance, Investing - January 8, 2021
With Bitcoin trading at an all time high, it seems like everyone is searching for how to buy Bitcoin. In this process there are questions like – is Bitcoin illegal, is it a scam, who owns it, which exchange sells Bitcoin? But the first question you should ask is – why does Bitcoin have value? In this video we discuss this basic question.
One of the reasons for the rise is Bitcoin is up because the US dollar is down. How can the dollar be down? Isn’t $1 still $1? Yes, but what that dollar can buy has gone down, this is called inflation.
The power of dollars is measured in terms of what it can purchase. This is called ‘purchasing power.’ Inflation causes the purchasing power of the dollar to fall. A period of inflation will decrease the amount of goods and services you can purchase with the same number of dollars.
In the 1900s, $1 could buy you 10 movie tickets, 5 pounds of sugar, or 1 pound of chocolate. In 2021, $1 can’t even get you a breakfast meal at McDonald’s. This means $1 in 1990 is worth about $30 today. That’s inflation at work. How do we fight it?
A way to fight inflation using the dollars which are decreasing in purchasing power to invest. Investing in assets which go up in price helps decrease the downward pull of inflation. Bitcoin is one such asset which people think will go up in price to fight inflation. That is why in March 2020, $4,000 could buy you 1 whole Bitcoin, and now $4,000 will get you less than a tenth of 1 Bitcoin. This means that Bitcoin’s price as a “store of value’ has gone up because of inflation.
Another reason for inflation is supply and demand. There is no limit on how many dollars can be printed. The government tends to print more dollars when there is a crisis. In 2020, due to the pandemic, people needed money, and the government printed more dollars. But the goods that can be bought with the dollars do not have an unlimited supply. Only so much bread can be baked, oil extracted, and vegetables grown. What happens when the supply of something (dollars) increases and the demand of something (goods) decreases? Inflation.
Unlike the dollar’s unlimited supply, there’s only so much Bitcoin that can be printed, created, or ‘mined.’ The maximum amount of Bitcoin that can be mined is 21 million. At any point the total number of Bitcoins created can be calculated and verified. As of today, 18.5 million or 88% of all Bitcoin are already in existence. No other asset, not gold, not the US dollar, has such a fixed and verified supply.
Add to the mix that in the past year several big companies have purchased more than $1 billion in Bitcoin. These companies think that the dollar’s purchasing power is going down and a result Bitcoin’s price, because of its fixed supply, will go up. With every purchase, the amount of Bitcoin left for you and I is decreasing, causing more everyday investors to buy Bitcoin. That is why the price of Bitcoin is increasing.
More dollars, less Bitcoin – something’s got to give!
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