One of the things that confused me before I started learning about crypto, is how difficult Bitcoin is to use as a currency. It’s volatile, it’s slow, it’s energy intensive and overall just difficult to use.
How is such a clunky technology supposed to be the future of money? Even with supposed improvements coming in the future, such as the Lightning network?
Turns out, Bitcoin isn’t really “currency” at all, which is incredibly confusing given that Bitcoin is often called the world’s first “cryptocurrency“.
What Bitcoin is instead is a store of value.
Unlike traditional currency, like the US dollar, which is controlled by a central government and can be minted at will, Bitcoin has a hard limit at 21 million tokens. That means more can never be created, which creates scarcity. Scarcity in turn creates value.
This is similar to how valuable metals such as gold and silver have value, which is why Bitcoin is increasingly being referred to as “digital gold”.
Except Bitcoin is rarer than gold. Because there is a hard limit. With gold, on the other hand, 2500-3000 tons of the stuff is mined out of the ground every year.
Bitcoin also has other obvious advantages over gold as well: it can’t be faked, it doesn’t take up physical space, it can be transmitted easily over long distances, etc. No wonder then that Bitcoin has skyrocketed in value over the past decade, while the price of gold has been stagnant.
Understanding this value proposition, it starts to make sense that people have invested so much into Bitcoin over the course of the pandemic. There are many reasons for the rise in value of Bitcoin over the past year, including government stimulus money, increase in retail trading, and growing adoption among institutions, but one of the primary reasons is as a hedge against inflation.
As governments around the world print trillions in order to keep their economies afloat, it’s inevitable that inflation will begin to rise as the currencies become devalued. Bitcoin on the other hand has a hard limit at 21 million coins, making it a great inflation hedge.
It can seem strange at first to see a digital asset valued so highly, but ultimately value is what people ascribe to a thing, whether that thing happens to be a piece of paper printed by a government, a shiny rock, or a cryptocurrency.
Even traditional currency mostly exists as bits these days– just a small portion of it is actually minted as physical bills or coins.
Except currencies such as the US dollar are controlled by a central entity (the US government) whereas cryptocurrencies such as Bitcoin are completely decentralized. Whether you think that’s a bug or feature depends on how much faith you have in the US government.
Nevertheless, Bitcoin serves as a scarce resource and an investment vehicle. Seen this way, the argument that Bitcoin has real value starts to become more compelling. It’s more than just hype, scammers and money laundering.
What the ultimate value of Bitcoin will be is an unknown, but my guess is that it has much higher to go given the limited adoption of Bitcoin so far among most people. It’s still early days in the world of decentralized finance. Bitcoin is a long term investment and store of value holding onto.
Just don’t go trying to use it as a currency, like the poor folks in El Salvador. Otherwise, in a few years you may end up with an embarrassing holiday named in your honor!