Learning Crypto: Why Does Bitcoin Have Value?

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Let’s compare Bitcoin to other mediums of exchange that are considered valuable, like fiat currencies and gold.

Gold has been a staple of wealth for thousands of years. Due to its appearance, durability, and scarcity, gold has maintained a level of faith and understanding as a stable form of value for a very long time. Fiat currency first began as an extension of gold. It was a lightweight paper representation of an amount of gold that was accounted for and stored somewhere safe. In 1971 the U.S. president Nixon took the USD off of this Gold standard. So we are now left with the USD which is now backed by nothing more than confidence in the U.S. government. It’s also worth it to note that this also means there is potentially an unlimited supply of USD that can be printed. This can cause a flooding of the supply and weaken the strength of the dollar.

Now let’s take a look at Bitcoin.
Bitcoin was designed by an anonymous individual who goes by the pseudonym Satoshi Nakamoto. He designed Bitcoin in such a way that in order to unlock a new Bitcoin, one would need to have a computer that would run a specific program.

Essentially, the computer running the program solves mathematical equations and sends its results to the Bitcoin Network. If the network is satisfied with the work that the computer accomplished, that computer is rewarded with a new Bitcoin. Every 4 years the difficulty level for these mathematical equations increases, in fact, it doubles. This requires more computational power, meaning more expensive computers and more energy needed to run them. This all means more money needed to invest in producing Bitcoins. One other aspect to Bitcoin is that there is a limited number of coins ever to be produced, that number is 21 million. This guarantees that hyperinflation will not occur and according to the law of diminishing returns, the price will continue to rise.

In addition to how they are produced, Bitcoin has properties like fast transactions, you can send it across borders, and you are able to be in complete control of your wealth without the need for a third party to store it for you, like a bank, which often times practices fractional reserve banking. If you are not yet familiar with fractional reserve banking, I think it is well worth your time to look into it.

So now that you have a better idea of where Bitcoin derives its value, in the future we will be looking at why other cryptocurrencies exist, how they are different, how to purchase your first cryptocurrency, how to store them safely, and general best practices when it comes to managing your cryptocurrency investments.

More on gold: https://bebusinessed.com/history/the-history-of-gold/
More on fiat currency: https://en.wikipedia.org/wiki/Fiat_money
What happens when all Bitcoins have been mined: http://www.investopedia.com/news/what-happens-bitcoin-after-all-21-million-are-mined/

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