Have you ever pondered why Rs 100 is worth what we believe it is? When the government demonetized a few currency units a few years ago, 500 and 1,000 became useless suddenly. So, what gives 2,000 its current value?
Of course, there’s the complex link in supply-demand measures, but it all comes down to trust! The faith we have in the government and the monetary system that is in place. Bitcoin (BTC) is neither issued nor backed by a central bank, so where does its inherent value originate from?
When discussing the value of Bitcoin, factors like decentralization, distribution, scarcity, security, and trust systems all play a part.
Value of Bitcoins Distribution, Decentralization, and Security
Instead of depending on a central authority, blockchains empower and liberate people.
No one organization can make choices on behalf of everyone. DLT (distributed ledger technology) is non-restrictive and permissionless. They are both transparent and safe. DLTs do not store information in a single location. Instead, it disseminates data over a peer-to-peer network. The distributed ledger technology (DLT) and its immutable record of transactions are available to all network members.
A blockchain network provides more trust and security since network members would get accurate and timely data. Furthermore, no one has the ability to delete a transaction.
Trust & Scarcity
The major source of value for Bitcoin is its limited supply and rising demand. Its supply is intended to be restricted. Bitcoins, unlike the conventional currency, are not printed. Instead, they are extracted from the system. To authorize consensus-based transactions, Bitcoin uses a decentralized network of independent nodes.
In layman’s terms, a miner is a collection of computers (or nodes) that execute the mining application. There will only ever be 21 million BTCs.
A rare item might fetch a high price, while numerous assets can command a lower price. Bitcoin supply has been decreasing since its start. Bitcoins may be generated at a predetermined pace, and that rate is supposed to slow down over time.
The number of Bitcoins created every block is cut by half every 210,000 blocks or about every four years.
Miners use software to solve transaction-related algorithms that validate Bitcoin transactions.
Miners are rewarded with a set amount of Bitcoin every block. This provides an economic incentive for them to continue solving transaction-related algorithms, hence sustaining the broader system. Miners are responsible for not just verifying and validating transactions, but also ensuring that new Bitcoins are introduced to the system at a consistent and predictable pace. This is when trust comes back into play.
What happens after all 21 million BTC are mined, given that there will only be 21 million? Because these tokens are generated at a decreasing pace about every four years, the final Bitcoin is scheduled to be released in 2140.
Around 2140, the quantity of BTC in circulation will stay constant. This figure was calculated by taking into account the average time it takes to validate and build blocks, which is expected to be 10 minutes.
So, every 10 minutes, a fixed number of BTCs are added to the supply, but this supply is planned to be cut by half every four years.
The supply constraint, which makes BTC rare, is driving the economics behind it right now. The fundamental economics are certain to alter after all of the BTCs are mined. Miners will then depend on transaction fees.
Bitcoin was designed as a means of commerce, but it is now more often utilized as a store of wealth.
Because this ecosystem is constantly evolving, its fundamental story may change again between now and when the final BTC is mined. So, what will be the economic motivation for miners if all BTCs have been mined? They will be compensated with transaction fees.
When it comes to any valuable item, the price one decides to pay for it is usually socially agreed upon and based on supply and demand parameters. Because BTC is a digital currency that is not real, many have questioned its true worth, failing to understand scarcity and production cost factors.
BTC is sometimes linked with monopoly money – a forgery. Those that grasp the protocol’s scarcity and complexities, on the other hand, find value in this.