Bit by Bit-coin, Understanding the Nature of its Value

We all have been taught that some things are worth more than other things, like jewelry is worth more than a t-shirt, or a television is worth more than a laptop. This creates what feels like an intrinsic understanding of value, but this “value” that we conceive goes through a medium: currency.

Why does Currency Have Value?

Economics has taught us that values are subjective and things have value because someone wants it. For example, suppose a person has a fish and wants to buy a cabbage, but the cabbage seller does not accept fish as a form of payment. The fish owner could either find someone willing to trade his fish for cabbage, or trade his fish for something the cabbage seller is willing to accept. In this scenario, each person valued their own good over the other and only exchanged their goods with something worth equal or greater of value. These goods don’t have a price, but rather a value, an arbitrary level of worth based on the how desirable it is to another person. Since the value of an item varies from person to person, it is hard quantify the worth of an item without some form of standardisation to go by; so we created currency as a way to measure, compare, and exchange these different forms of value between one another. And what gives currency its value depends on the governments that declare it as legal tender and their willingness to accept tax payments through it.

Why do Bitcoins Have Value?

Bitcoin, in its essence, is a shapeless, formless, virtual entity compiled through a string of programming and computer networks, but it appears to have value. A surface level answer would because bitcoin provides privacy, convenience, and independence from central banks and intrusive governments, but in simpler terms there are people who accept and trade Bitcoin with other people who accept and trade Bitcoin. In short, Bitcoin’s value can be attributed to people who recognise it as a form of currency, and so the more people who use it the greater the value it has. This is known as the "network effect", which is the effect that one user of a good has on the value of that product to other people.

Digging a Little Deeper

This is great and all but that still does not really answer the real, burning question - why are Bitcoins worth anything? In all fairness it is a really tough question and there is no real definitive answer for it because values are subjective. People can say that one bitcoin equals to an x amount of dollars or euros etc, but really a bitcoin is worth whatever individuals choose to believe they are worth. If you believe they are worth an x amount of dollars than by all means that’s what they are worth, but on the other hand if you don’t believe in bitcoins then it is worth absolutely nothing. As Pelatiah Webster, a lesser known founding father, explains “The thing which makes money an object of desire—which gives it strength of motive on the hearts of all men—is the general confidence, the opinion which it gains as a sovereign means of obtaining everything needful. This confidence, this opinion, exists in the mind only, and is not compellable or assailable by force, but must be grounded on that evidence and reason which the mind can see and believe.”

Anything can have a value, but unless it is desired by someone it is worth nothing.

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