Learning Crypto: Where Does Bitcoin Get Its Value?
Welcome to Learning Crypto.
I’m taking it way back to the basics.
This is a new series of videos that I’ll be publishing about once a week that will be focusing on the common questions asked by those who are just beginning to scratch the surface of bitcoin, cryptocurrency and blockchain technology.
This is Learning Crypto.
Today we are going to explore the question: Where does Bitcoin get its value?
So let’s compare Bitcoin to other mediums of exchange that are considered valuable, like fiat currencies and gold.
Gold has been a staple of wealth for thousands of years.
Due to its appearance, durability, and scarcity, gold has maintained a level of faith and understanding as a stable form of value for a very long time.
Fiat currency first began as an extension of gold.
It was a lightweight paper representation of an amount of gold that was accounted for and stored somewhere safe. In 1971 the U.S. president Nixon took the USD off of this Gold standard. So we are now left with the USD which is now backed by nothing more than confidence in the U.S. government. It’s also worth it to note that this also means there is potentially an unlimited supply of USD that can be printed. This can cause a flooding of the supply and weaken the strength of the dollar.
Now let’s take a look at Bitcoin.
Bitcoin was designed by an anonymous individual who goes by the pseudonym Satoshi Nakamoto.
He designed Bitcoin in such a way that in order to unlock a new Bitcoin, one would need to have a computer that would run a specific program.
Essentially, the computer running the program solves mathematical equations and sends its results to the Bitcoin Network. If the network is satisfied with the work that the computer accomplished, that computer is rewarded with a new Bitcoin.
Every 4 years the difficulty level for these mathematical equations increases, in fact, it doubles.
This requires more computational power, meaning more expensive computers and more energy needed to run them. This all means more money needed to invest in producing Bitcoins.
One other aspect to Bitcoin is that there is a limited number of coins ever to be produced, that number is 21 million.
This guarantees that hyperinflation will not occur and according to the law of diminishing returns, the price will continue to rise.
In addition to how they are produced, Bitcoin has properties like:
- Fast transactions
- Send it across borders
- Complete control of your wealth
This means no need for a third party to store it for you, like a bank, which often times practices fractional reserve banking. If you are not yet familiar with fractional reserve banking, I think it is well worth your time to look into it.
So now that you have a better idea of where Bitcoin derives its value, in the future we will be looking at:
- Why other cryptocurrencies exist & how they are different
- How to purchase your first cryptocurrency
- How to store them safely
- General best practices when it comes to managing your cryptocurrency investments.
Additional Reading:
More on gold
More on fiat currency
Fractional Reserve Banking
Highly Recommended Book on the Banking System- Focuses on Fractional Reserve Banking
Nixon removes Gold Standard
What happens when all Bitcoins have been mined
Another little piece of note...if you use the comparison of Rarity, 1 bitcoin is as rare as 19 lbs of gold...assuming ~363,762,732 lbs of mined gold currently in the world, and 21 million bitcoin.
Thats about $388,000 USD per bitcoin.
Here is why I think cryptos have value they can be used as a utility:
You see we are moving into a world of computational trust as people, governments and companies lose trust in each other. What do I mean by 'computational trust': hundreds of thousands of computers witnessing a transaction. New technology known as a token called bitcoin blockchain is a 'utility' and since it can be used like money some are doing such like me and my friends. The utility is: the most secure data base ever invented. As simple as that. My analogy is: picture it like a big spread sheet (an excel spread sheet) with 21 million cells. Each cell has a password assigned to it and that is called the keys to that cell. These keys can be transferred to other cell keys and are then owned or controlled by the new keys. There is even an open source protocol that releases these cell ownership controls over time ensuring decentralization and utilizing consensus systematic for any updates.
So now, what's the big deal in having a spread sheet that you can transfer cell ownership rights to each other? This spreadsheet is validated by lots of processing power every 10 minutes. Validated; means witnessed or notarized by the community and to date more processing power is validating the bitcoin blockchain than has ever been used for a single purpose in the history of mankind. Now then how does it become money or a type of currency: it becomes money when a value is attached to the controlling or ownership of the cell. Why would someone want to own such a utility or a portion of it? There is value in someone notarizing (witnessing) contracts in a manner so secure it has had zero down time and zero hacks or errors from the early stages - currently (bitcoin) now running over 9 years worth of 10 minute blocks of transactions. I call it triple entry accounting: a transaction 1) buyer 2) seller 3) witness by ledger and community (hundreds of thousands of witnesses). Or debit, credit and witness. You can sell services on this backbone and therefore owning control allows for a return on investment.
you are right greenman....boss
We need to take the power and abuse out of the banks hands and place it where it should be....in the person's hand who owns it. It should never cost us money to use OUR money! This amazing tech gives us that opportunity and so much more. The future is in the blockchain and hopefully the tangle as well. I believe in both. I believe they can coexist forever and we can all be millionaires for using it now! Cheers guys! Let's watch it grow and help it!
However, when determining price, one must also consider the amount that buyers are currently willing to pay for the future value of a specific item. In other words, if the market believes the price of something --like property, a certain stock or Bitcoin-- will increase in the future, they are more likely to pay more for it now.
Some of the instances where Bitcoin currently has utility was mentioned above, but since Bitcoin is an evolving and improving technology, many are optimistic that there are many other use cases to come. Some, perhaps, that we haven’t even thought of yet.
greenman.i think i feel this piece of information...please follow @legitimatefreak.thank you
good effort
Likeee
Great explanation
HEIDI! this is my favorite video thus far! that ostrich and you made a good combination. Props to the cameraman too for the genius zoom!
Very informative towards the value of all crypto in general thank you!
@kevbot, I agree with you with this being my favorite so far ;)
Nice Island, where is this located?
No island, that is South Africa
This is awesome! That ostrich was too cute! Great video on beginning Crypto!
Wow! This is EXACTLY what I need right now! I have been a member of SteemIt for almost a year, but I've only recently begun to see the potential of investing in crypto.
I've been reading articles and watching videos for the past two weeks, yet I've not come across any that were really made for newbies like myself.
I think your new series will be just what I need to get a well-rounded crypto education. Looking forward to them!
Thanks for doing this series, Heidi. Your videos are a huge help to me, so I'll definitely be keeping an eye out for how this one develops so I can share it with my friends in Facebooklandia. :)
Bitcoin and crypto in general is better than gold. It is something that can be rare as gold but is easier to spend than money if fully adopted. Crypto is the future and we have the privilege to one of the first to get into this strange new world and profit from it.
@heiditravels the Ostrich wanted to listen to you about Cryptos. He or She has pulled their head out of the sand. He or She wants to be aware of Bitcoin before the public really catches on....................
Any ideas on the upcoming hard fork? Are you going to consolidate your holdings into bitcoin to potentially receive more of the new currency?