The average individual doesn’t understand how bitcoin can be so highly valued. In fact, many just think that its value is highly driven by speculations seeing as it’s an intangible object. And this is why many have adopted a wary stance regarding it.

In fact, most traditional “finance experts” who have consistently bashed the cryptocurrency do so because they have zero idea about how it works. If they did, they would jump on it almost immediately. So, this piece is meant to show why bitcoin is as valued as it is. To do this, we would have to explore what gives traditional fiat its value.

To start with, the first thing you need to understand is that belief plays a crucial role in determining the value of money or in this case, bitcoin. Money wasn’t always in the form of cash as we know it. In the past, people traded shells, rocks, gems, or bartered.

In every instance, there was a collective decision to use a certain object as something that symbolized money. The continued use of this was then passed on from one generation to another, one society to another, until it became a widespread phenomenon.

Every time a certain object had to be used as money, people had to agree that they would use it. Once they did, it took on a life of its own and became valuable. Value has always been a societal construct, and will continue to be that way for the foreseeable future. It is this same value that we’re seeing play out in the likes, tweets, retweets, hits, shares, and other social media “rewards” that indicate value.

The value of thing in the society is dependent on the majority buying into it. Money as we know it is a legitimate means of exchange because we all agreed that it should be. If the society decides that we don’t want paper based money, all the cash in the bank vaults across the globe would become useless within a day of this agreement.

They would hold no meaning or value. In fact, a clear case of this can be seen in the Venezuelan and Zimbabwean economies. With hyperinflation, individuals often need millions of Zimbabwean dollars just to buy bread.

The same goes for Venezuela. It is not often unusual to see people stomp on or walk past stacks of these countries’ currencies without paying them any mind. That’s because the society has collectively deemed them useless and incapable of meeting their purchasing power.

Consensus plays a key role in the adoption of certain objects as money. People must agree to do so. But in order for them to opt for that particular object –bitcoin in this case- the object must meet certain criteria or have certain attributes.

These attributes are what will then transform it into an object of value. If an object like bitcoin meets the laid down criteria and have these attributes, then it should be easy to place some value on it. Let’s quickly explore these attributes:

All worthwhile currencies are usually scarce and incapable of being produced by anyone, anywhere. You can’t just pull it out of thin air and expect it to be valuable. It never works that way. The scarcity is important to help keep it valuable.

It’s even better when the scarcity is done naturally and not influenced by other factors or elements. Bitcoin’s value is directly tied to its present scarcity; a scarcity that’s tied to its environment and structure.

This is one of the reasons bitcoin is so valuable. Right now, there can only be 21 million bitcoins in circulation. Doing so requires the use of specialized equipment which are finding it harder and harder to mine.

This is not surprising seeing as over 80 percent of the tokens have been mined. Think of it in terms of gold or any other precious metal. You have to put in a lot of work before you can mine, purify and then make it available for consumption.

Bitcoin’s supply is fixed and cannot be altered. This is part of what drives its value. The scarcity and the realization that there’s nothing anyone can do to add to that market supply, makes it so attractive and therefore, very valuable.

All currencies should be worth their exact value at every point in time and mutually interchangeable, regardless of their history or future use. So, it doesn’t matter if a $1 note was printed in 1964, as long as it’s still legal tender, the $1 is worth the exact same amount.

Ever heard the saying, a dollar is a dollar is a dollar? That’s just another way of saying that money is fungible. “Money raised for one purpose can be easily used for another”. The same goes for bitcoin’s current state.

It’s a fungible token with the same properties as your regular fiat currency. It doesn’t matter if your bitcoin was mined in the early 2010s or yesterday, it is still useful, valuable and interchangeable.

All cash currencies are very stable in their daily, weekly, monthly or annual value. That means you can plan your purchase for the future and be confident that the currency’s value would still be stable. This is where bitcoin is currently lacking.

Have you heard the about the son who told his dad he wanted a bitcoin for his birthday? Here’s how the conversation went:

Son: Hey dad, I want a bitcoin for my birthday

Dad: Isn’t that $16,000?

Son: Dad, don’t forget my gift of one bitcoin

Dad: Isn’t that $18,000?

Son: Dad, my birthday is tomorrow. Remember the bitcoin?

Dad: Son, isn’t worth $8,000 now?

Well… you get the idea. Bitcoin’s currently fluctuating price and instability is a major issue. But, it has been very stable lately. Bitcoin is acting more like a commodity that’s dependent on market activity, demand, speculation and news to determine its value.

Once this can be fixed, we may see bitcoin being used as an actual currency. This is one of the reasons why bitcoin is considered as more of a “store of value” tool than an actual currency that can be used as legal tender anywhere in the world. It’s also probably why its adoption has been slow.

One of the major attributes of money is security and the incredible difficulty in its counterfeiting. Any currency that can be easily counterfeited doesn’t have any value, as it means that people can easily pull money out of thin air, and print theirs.

An easily counterfeited currency will increase its supply wantonly. This is something that all legitimate currencies work hard to prevent. This is why you’ll find that they often have a certain texture, have security emblems and seals, and even strips that cannot be easily copies. The technology used in the production of cash is not easily obtainable.

The good news is that bitcoin is exactly like this. You cannot create counterfeits and there’s zero chance of double spending. This is what makes bitcoin such an excellent choice and contributes to its very high value.

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