Cryptocurrency is a program code recorded in a distributed ledger. Bitcoin is not backed by any tangible asset and is not tied to fiat currencies. At the same time, it has a price: you can buy it for other koins, dollars, euros or rubles. Bitcoin is worth real money, and this is a fact. In November 2021, the BTC rate was in the neighborhood of $60 thousand, and the maximum during this period was recorded at $69 thousand. People who know about cryptocurrency from the news can not accept this fact. They do not understand the reason for the high bitcoin rate.
How bitcoin differs from the currency
Fiat money is printed by the government. They are not backed by tangible assets, and the value depends on the authority of the country and the level of gross domestic product (GDP). The currency used to be backed by gold reserves. In 1971, the world’s heads of state abandoned the pegging of money to precious metals. A complex system of exchange rates has been developed, which is influenced by economic crises, military conflicts, and other political factors.
Bitcoin is different from fiat money. It is not controlled by anyone, the emission is carried out by mining. In simple words, it arises and remains on the Internet. Therefore, it is not uncommon to find the opinion that Bitcoin is a scam. However, the creation of cryptocurrency is a progressive and completely different approach to the concept of money.
Initially, users solve a mathematical problem that was invented by the developer of the first cryptocurrency, Satoshi Nakamoto. Miners create another block with transactions, write to the blockchain. This is the difference between coins and fiat currencies. Data is stored in the blockchain – a distributed decentralized network.
User computers connected to the system provide the functionality. Transactions are stored in full nodes, so information cannot be deleted or erased. The principle of irreversibility is used.
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Differences between bitcoin and fiat currencies:
- The coin has no physical equivalent – it exists electronically, in program code format.
- Bitcoin transactions do not require a bank or other financial organization – a device with an internet connection (PC, smartphone, tablet) is sufficient.
- Coin cannot be counterfeited – this happens frequently with fiat money.
- Bitcoin ensures the anonymity of transfers – at the same time, information about transactions is open, except for information about the owner.
Advantages of BTC
Coins serve any settlement transactions, are a payment instrument on a par with fiat currencies. In some countries they are prohibited, in other countries digital assets are legalized, but are considered a commodity. In Japan, Belarus, Germany and a number of other countries, cryptocurrency is allowed as a means of payment.
The advantages of bitcoin are summarized in the table:
| Fiat currencies | Coins |
|---|---|
| The state prints money as needed. Additional issuance creates inflation. If the printing press is mismanaged, the state’s currency is devalued | Bitcoin is issued by mining. This is done by users of the system or associations (pools). The developer laid down a limited amount – 21 million. |
| Money is not backed by tangible assets, gold, as it was before | Bitcoin is often called the new gold. It is the next stage in the development of the financial system, based on a decentralized network, without management by third parties, organizations, without government intervention |
| National and commercial banks serve the monetary system. You cannot send currency without their involvement. Banks perform transfers and other operations with money, track the origin of funds, can block the account | Bitcoin is not controlled by anyone. Users themselves maintain the system, maintain the operability of the decentralized network. Only a cryptocurrency wallet and the counterparty’s number are required for a transfer |
| Money transfers, especially cross-border ones, are too expensive. You have to pay a fee, which is divided between the banks (sending and receiving parties). | Transactions in the network are performed by miners. Users pay for their services. The commission does not depend on the amount of the transaction, it is affected by the network load. The amount of remuneration to miners is lower than bank commissions |
| The transfer speed is low, it may take several days | Transaction time does not depend on the state, distance. The transfer speed is affected by network load. It is possible to speed up the transaction by putting a larger commission amount |
Why bitcoin costs money
Compared to fiat currencies, coins win on all parameters. Bitcoin costs real money, and its value is increasing. Analysts predict further growth of the rate. They call different figures, but the essence is the same – the value of the coin, expressed in fiat currency, is increasing. Sometimes the rate falls, correction is carried out, but in general the upward dynamics is maintained. With currencies it is the opposite: inflation is fixed, money depreciates.
The cost of bitcoin depends on different factors. It is influenced by:
- Limited issuance.
- The simplicity of storage.
- The trust of users.
- Opinion of famous people (financiers, economists, businessmen, politicians, celebrities).
- Confidence of investors.
Bitcoin is the first cryptocurrency. People trust stable things proven by time more.
Coin mining
The Bitcoin network uses the Proof-of-Work algorithm (PoW for short). To mine coins, miners solve a mathematical problem that Satoshi Nakamoto invented. This is a complex process that is demanding on the power of the equipment. If at the very beginning of the existence of cryptocurrency was enough an ordinary home PC, now special systems with additional cooling are required. All mining equipment uses a large amount of electricity. For example, in 2021, 182.12 TWh was spent. This is comparable to Thailand’s consumption level.
The expensive maintenance of the system affects the price of the coin. Meanwhile, the cost of maintaining the blockchain continues to rise, which will affect the exchange rate.
Useful properties
Cryptocurrency is perceived as a means of payment. However, bitcoin has other useful uses that add to its value. These include investing in the coin for the purpose of capital preservation.
Bitcoin is not subject to inflation. On the contrary, its rate rises, limited issuance ensures deflation. Over time, coins gain more value. You can conveniently store your money, and it is more profitable to use cryptocurrency than deposits from traditional banks. Decentralized finance is developing in parallel. This is a whole world of blockchain-based applications, including deposits and lending systems. You can not only invest in koins and store them in your wallet, but also buy coins profitably and deposit them at interest.
Bitcoin is a tool for trading. Cryptocurrency exchanges work, which offer income on its purchase and sale. There are different options: arbitrage, trading strategies and others. Modern exchanges have turned into cryptocurrency centers with their own token, exchangers, DeFi services.
A whole industry is being created around bitcoin. The ways of buying and selling are simplified: in addition to traditional exchange services and cryptocurrency exchanges, there are crypto-machines and bots in Telegram. Commercial banks are creating variants of payment cards with support for koins.
Different states are adopting legislation loyal to cryptocurrency. Official financial institutions have seen digital assets and have taken their useful properties seriously.
Investments
The trust in bitcoin by big business is another factor that influences the price. Investors are buying the cryptocurrency, using it as a means of accumulation, diversifying their assets. In 2020-2021, well-known large companies invested in bitcoin and other coins:
- MicroStrategy
- Tesla
- Galaxy Digital
- Voyager Digital
- Square and others.
The total investment volume of 5 companies is more than 193 thousand BTC, which is more than $11 billion (as of November 2021). The above organizations are major players in the global market, their opinion is authoritative. The interest of big business in bitcoin has a positive impact on the value of the coin.
However, investor confidence affects not only the price of the asset. It forms a positive public opinion about cryptocurrency. People begin to use this tool for calculations, savings, earnings. From this, the value of bitcoin and altcoins grows.
There is no connection with other assets
The first cryptocurrency is not connected with other coins, fiat money, gold. No tangible asset affects the value of bitcoin. Even the governments of different countries do not contribute to the price change. Of course, they can ban cryptocurrency or restrict its use by their citizens. Indirectly, this will affect the bitcoin rate. This was the case when the Chinese authorities did not allow the coin to enter the market. Then its value dropped slightly, but later the rate leveled off.
Previously, it was possible to observe the correlation between the price of bitcoin and the stock market. After the spread of cryptocurrency, the emergence of altcoins, the creation of smart contracts, DeFi applications, digital assets have turned into an entire ecosystem.
According to famous people, bitcoin is the first successfully designed monetary system in the world. Michael Saylor, CEO of MicroStrategy, the main investor in the first cryptocurrency, stated this.
The paradigm of bitcoin is changing: now it is no longer a speculative asset, but the best long-term investment instrument. BTC is worth money, its price is rising. Most importantly, it does not depend on other assets and is an independent system. It is an ideal way to preserve funds, saving them from inflationary processes in the traditional monetary network.
What affects the price of Bitcoin
Literally in a decade, the Bitcoin system has turned from a toy in the hands of enthusiasts into a powerful financial instrument. The price of the koin has grown from cents per BTC to $68 thousand (peak value in early November 2021). That’s a huge jump for an asset, especially in such a short time.
The main factor that influences the value of Bitcoin is user confidence. After all, the coin is essentially unsupported by real assets; Bitcoin does not have the economy of an entire nation behind it. Its value is based on people’s willingness to buy at a certain rate.
Bitcoin is quoted on cryptocurrency exchanges, it is a volatile asset. The value depends on different factors. For example, it can fall after a negative statement of a famous figure. So it happened after the words of Ilon Musk about the refusal to sell Tesla cars for cryptocurrency. Conversely, a simple tweet can raise the value of the asset.
The price of the coin changes for various reasons:
- News background.
- The attitude of large companies, use as a means to pay for goods, investment in cryptocurrency.
- Changes in the legislation of countries (legalization or prohibition).
The popularity of cryptocurrency
Bitcoin can be treated differently: trust the coin or consider it fraudulent, use, invest, trade on exchanges, earn or ignore completely, interact only with traditional financial institutions. However, no one will deny bitcoin’s popularity. Even those who do not understand the nature of digital assets and do not see the point in them have heard of the first cryptocurrency.
The prevalence of the coin reflects the rate. The price is constantly rising (taking into account temporary value adjustments). If the popularity of digital assets drops, it will instantly affect the price.
Summary
Bitcoin is worth the money. In 2021 alone, the price has increased by more than $50k. This is a testament to the demand for cryptocurrency. Society has long been looking for a replacement for the traditional banking system, financial institutions. Bitcoin is capable of becoming an alternative to gold and other measures of value. To do this, it is necessary to overcome volatility and gain the trust of states, to achieve legalization. Society and business are already ready for transformation and acceptance of digital assets as a means of payment, a tool for capital accumulation and earning on the stock exchange.
Frequently Asked Questions
💵 How much can bitcoin be worth in a year?
It is impossible to answer this question unambiguously. It is difficult to predict the rate of such a volatile resource. Experts call different amounts, including $100 thousand and more for BTC.
🤔 Isn’t fiat currency backed by the gold reserve of the state?
That was the case until 1976. The Jamaica Conference abolished the gold standard and stopped exchanging dollars for the valuable metal. States can now set their own national currency exchange rate.
📅 When will the last Bitcoin be mined?
The issue of coins is limited at the level of 21 million koins. Experts estimate that the last BTC will be created in 2140.
🤨 If there are no new Bitcoins, what should miners do?
They work to confirm transactions, create blocks of the distributed network.
😟 Can bitcoins be stolen from a wallet?
Cryptocurrency storage can not be hacked, for this you need to pick up private keys or a mnemonic phrase. Attackers lure or steal secret information from users, gain access to other people’s coins illegally.
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Author: Saifedean Ammous, an expert in cryptocurrency economics.
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