Bitcoin: From Whence Does It’s Value Come

This crazy little coin…why is it so valuable?

I was having a discussion with some friends last night about Bitcoin and it’s skyrocketing value. Each of us were basically saying the same thing in a number of different ways.  We were pondering the question of where Bitcoin gets it’s value.  Why is this digital asset worth so much, especially this week amid a flurry of reports focused on the rise above $8,000 USD.  I have tried to look at this from various angles.  I know that there are a finite number of coins available, but supply and demand is only one aspect of value.  What about intrinsic value?  Now, I know that in the US, the value of the dollar is not directly tied to gold or other precious metals, but by the full faith and credit of the American government.  This thought reminded me that while we question the intrinsic value of Bitcoin, we have not, since 1971 I believe, really questioned the value of the American dollar.  Many currencies today are fiat currencies, that is currency which is not backed by anything other than a governmental decree.  I am surprised to see how many people are unaware of the fact that the US dollar is fiat money.

The larger question then is not whether Bitcoin has value, but where that value is derived from and how we might be able to determine the course over time that this currency will take. With stocks, bonds, and mutual funds, we have the ability to look at similar offerings and see how they have performed over time and draw conclusions.  However, with cryptocurrencies, there really are no comps with which to analyze the market.  We are now beginning to see some large financial institutions turning course and giving some attention to this centrally unregulated currency.  However, no one really seems to be able to provide justification to their views on Bitcoin.  Many talking heads are making arguments both for and against Bitcoin, but I have yet to be able to trace their comments back to meaningful insight.  I am sure that financial analysts are using some method to do what analysis they can, but what do they have to draw from outside of the general performance of fiat currencies?

I would be interested in hearing the insight of our readers as to what they are using to help them understand the value of Bitcoin.  I know many of you are making investments.  What is driving your decision?  I have made some investments, both in mining Bitcoin and buying coins.  I have many friends who are not technical people and they do not care about the technological advancements of block-chain technology, but they believe in the future of cryptocurrencies like Bitcoin.  Please share your insights with the community and stir up some conversation.  I am eager to hear everyone’s input on the matter and hopefully it will make us all a bit wiser.

Links:

Yahoo Finance (BTC/USD)

The Motley Fool: Fiat Currency

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