If you are looking for hassle-free and quick methods for transferring funds across borders, you should consider the Bitcoin. Bitcoin is a decentralized digital payment system that is not controlled by any government, making it a popular alternative to fiat currencies. But how does Bitcoin get its value if it is to be deemed as a currency just like any fiat currency?
Fiat currencies today are issued by respective governments and these are not backed by commodities. Besides being a store of value, any successful currency has to satisfy criteria like utility, divisibility, durability, counterfeitability, and transportability.
- One of the basic factors necessary for maintaining a currency is the supply. Fiat currencies are printed by governments to control scarcity; when there is a prefixed inflation amount, the value is likely to go down. Bitcoin has a finite supply of 21 million coins; almost 18 million Bitcoins have already been mined as of now and the Bitcoin value is halved every 4 years. In the event that the halving protocol does not change the supply will be past 19 million during 2022. While the supply of Bitcoins is enough to keep the mining process continue unabated, things will change when the 21 million limits comes closer. Scarcity is known to escalate values as has happened with precious metals like gold.
- If you consider the total amount of Bitcoins in circulation, the amount is strikingly lower than those of other currencies. Every Bitcoin has far greater divisibility than a fiat currency like the USD. This extreme divisibility of the crypto coin makes its scarcity possible. Even when Bitcoin gains in price, users having tiny Bitcoin fractions can continue to be a part of daily transactions.
- Since the Bitcoin is founded on the blockchain technology it has a lot of value; this is undeniably its biggest selling point. The blockchain is a like a distributed ledger of transactions which is trustless and decentralized. So, not parties have to establish trust in each other for this system to work. This is made possible because of a comprehensive checking and verification system.
- Because of the ready availability of Bitcoin wallets, Bitcoin exchanges, etc Bitcoins can be transferred with ease between parties. Regardless of how big or small the amount is it can be seamlessly processed with low costs. When you transfer fiat currencies, the waiting period is much longer and transfer costs are higher. Transportability is a key feature of currencies and while you will need a lot of mining power to mine the Bitcoin, maintain a blockchain and verify transactions, Bitcoins do not exist physically.
- Durability is another important feature to be considered when discussing Bitcoin’s value. For instance, ay dollar bill may become unusable if it is damaged or tampered with. But, any digital payment system cannot be harmed likewise; this is why Bitcoin is highly valuable. You cannot destroy the Bitcoin like any fiat currency. Bitcoins however may be lost or stolen if you lose your private keys.
- Finally, Bitcoins cannot be conveniently counterfeited like fiat currencies. To do, hackers will have to change the hash in every block and this demands an incredible amount of computing power. Unlike fiat currencies where you cannot spend one dollar bill in two different transactions, users transferring Bitcoins may try to do this in two different settings, thereby making a duplicate record. But this event called a double spend is rather unlikely simply because hackers must have more than 51% of the power to falsify records.