Why Bitcoin Has Value

Bitcoin is not backed by a central bank (or any other financial institution), it does not represent a stake in a company and it does not generate interest on its own. So why does anyone pay money for it?

The simple answer is that the value of anything does not arise solely because an institution declares it.

Something has value when other people consider its properties useful and are willing to exchange goods or money for it.

That is exactly what happens with Bitcoin.

Where Bitcoin's value comes from

Bitcoin is valued for a combination of:

Scarcity.
Ease of transfer and transport.
Security and resistance to counterfeiting.
The ability to hold it yourself.
Anonymity.

There is no asset in the world that brings all these qualities together. That is why Bitcoin is an asset that some people value or want to hold.

Another factor is the network effect. In other words, the more people, companies, platforms and applications use Bitcoin, the easier it becomes to buy, sell, store or send it, and the more value is attributed to it.

The security is another factor. Bitcoin has been running since 2009 and protects considerable value. Its track record does not guarantee the future, but it does give us some clues as to how things may develop.

However, Bitcoin does not have an “objective” value, unlike, for example, a company, which can be valued by studying its revenue, profits and assets.

Bitcoin does not have an income statement. Its price depends on how much value the market assigns to its properties and on expectations about its future use.

That is why two people can understand perfectly well how it works and reach different conclusions. For example, one may think its scarcity and decentralization justify a high price, while another may believe its low adoption reduces its value.

In fact, it is similar to gold -it is worth what the market decides it is worth-, with the main difference that gold can be used to make jewelry.

Why there will only be 21 million bitcoins

We already mentioned in the article about how Bitcoin works that the protocol sets a maximum limit close to 21 million bitcoins. They are not all created at once; instead, they enter circulation as part of the reward miners receive for adding blocks.

That reward is reduced approximately every four years. The process is known as halving. If 50 bitcoins per block were generated at the beginning, the amount has fallen to 25, 12,5 and so on. The reductions will continue until issuance is practically zero.

And, because of how the system is built, it is extremely difficult for more than those 21 million bitcoins to be created. This distinguishes Bitcoin from fiat money, whose supply is changed through monetary policy decisions.

However, a limited supply does not automatically create value. Think of how many scarce objects nobody wants. That is why, scarcity only matters if there is demand willing to pay.

What makes Bitcoin's price rise or fall

The price is formed in markets where buyers and sellers exchange BTC. If buying demand is greater than the available supply, the price tends to rise. When the opposite happens, it falls.

Factors that can increase or reduce demand include:

The economic situation and market liquidity.
Bitcoin's own cycles: there are always alternating periods of rises and falls.
The entry and exit of large investors.
The composition of holders: retail customers vs institutional investors.
Regulation.
The emergence of financial products such as ETFs that track its price and increase demand.
Problems at platforms.
Adoption and technological development.
And, above all, expectations. Bitcoin is especially sensitive to what the market believes will happen next.

In addition, for now, liquidity is lower than in the major markets for equities. This makes sharper movements easier: a wave of buying or selling can have a major short-term effect on the price.

One more thing: it is important to distinguish value from price. You may think Bitcoin has valuable properties and still consider it too expensive. You may also believe its usefulness is limited and still buy it speculatively because you think the market will maintain strong demand.

Ultimately, supply is known (21 million), but demand is not. And the price depends on both.

Next steps

Below are the next articles in the series. They are designed so that, if you do not know much about Bitcoin, you can read them in order, but they all stand on their own, so you can jump to whichever interests you most:

Frequently asked questions

Why does Bitcoin have value?

Bitcoin has value because there are people willing to pay for properties such as its scarcity, ease of transfer, the ability to hold it yourself and resistance to counterfeiting.

Where does Bitcoin's value come from?

It comes from how the market values its characteristics and from expectations about its future usefulness. There is no institution that sets what its value should be.

Is Bitcoin backed by a central bank?

No. Bitcoin does not depend on a central bank and does not represent a stake in a company.

Does Bitcoin generate interest or profits by itself?

No. Bitcoin does not have an income statement and does not generate income by itself in the way a company might.

What characteristics can give Bitcoin value?

They include its scarcity, ease of transfer and transport, resistance to counterfeiting, the ability to self-custody and the privacy characteristics it offers.

How important is the network effect for Bitcoin?

The more people, companies, platforms and applications use Bitcoin, the easier it is to buy, sell, store and transfer it. That can increase its usefulness for people participating in the network.

Does Bitcoin's security influence its value?

Yes. Bitcoin has been running since 2009, and its operating history can influence the confidence some people have in the network, although it does not guarantee what will happen in the future.

Does Bitcoin have an objective value?

Not in the same sense as a company, which can be analyzed through revenue, profits and assets. Bitcoin's valuation depends largely on how much the market values its properties and possible uses.

Why is Bitcoin compared with gold?

Because both have a limited supply and their price depends largely on what the market is willing to pay for them. One difference is that gold also has physical uses, such as making jewelry.

Why will there only be 21 million bitcoins?

Because the protocol sets a maximum limit close to 21 million. New bitcoins gradually enter circulation as part of the reward miners receive.

What does the halving have to do with Bitcoin's scarcity?

The halving reduces, approximately every four years, the number of new bitcoins generated per block. These reductions will continue until new issuance is practically zero.

Does the fact that only 21 million will exist guarantee that Bitcoin has value?

No. Scarcity by itself does not create value. For it to matter, there also has to be demand from people willing to pay for the asset.

Who decides Bitcoin's price?

The price is formed in markets where buyers and sellers exchange BTC. If demand rises relative to available supply, the price tends to rise; if the opposite happens, it tends to fall.

What factors can make Bitcoin rise or fall?

They include the economic situation, market liquidity, Bitcoin cycles, the entry or exit of large investors, regulation, adoption, platform problems and market expectations.

Can ETFs influence Bitcoin's price?

Yes. Financial products that track its price can make it easier for new investors to gain access and therefore influence demand.

Why is Bitcoin's price so volatile?

One reason mentioned in the article is that its market has less liquidity than the major equity markets. This makes large buying or selling moves have a greater impact on price.

Are Bitcoin's value and its price the same thing?

Not necessarily. You may believe Bitcoin has valuable properties and at the same time think its current price is too high.

Can someone buy Bitcoin even if they think its usefulness is limited?

Yes. Someone may buy it speculatively if they believe demand will continue to exist, even if they do not consider its characteristics especially valuable.

What is more predictable in Bitcoin, supply or demand?

Supply is much more predictable because its issuance rules are known. Demand, by contrast, changes constantly and is one of the main reasons its price varies.

Does Bitcoin having value mean its price will rise?

No. The market valuing certain properties of Bitcoin does not guarantee that its price will rise, because price also depends on demand and on the expectations of buyers and sellers.