More than a decade after its birth from the ashes of the 2008 financial crisis, bitcoin is still a niche investment. Predictions that bitcoin will hit $ 1 million or more seem extremely optimistic.
Nor does it show signs of becoming the primary medium of exchange. Bitcoin is no closer to universal acceptance than it started with. But cryptocurrency has survived two major anomalous crises and numerous other minor facts, and is now on the upswing.
Unlike many smaller cryptocurrencies, its value has never dropped to zero, indeed, over the 12 years of its existence, its value has increased dramatically - here the quotation in real time. To understand a bit more about bitcoin, is it instructive to look at how fiat currencies work and what gives them value?
Bitcoin and traditional currencies
There are two different theories about what gives value to traditional currencies: what we might call the "gold theory", whereby the value of a fiat currency is conferred by the gold to which it is anchored, and the "tax theory ”, According to which a fiat currency has value because people have to pay taxes with it.
Of course, neither applies to bitcoin: it has never been pegged to gold, and no government accepts taxes paid in bitcoin. So are there other ways a currency can gain and hold long-term value?
Supporting the theory of gold or that of taxes has a deeper fundamental: the belief that what supports the currency is itself reliable. What gives value to the currency, therefore, is the confidence in what supports it.
What does bitcoin claim?
Responding to the criticism that "bitcoin is not backed by anything," investment website Fidelity Digital Assets said: "Bitcoin is backed by the code and consensus that exists among its key stakeholders."
This is a declaration of faith. It means that "the code is perfect and interested parties would never do anything to make it less than perfect". Neither is necessarily true, but all that is required for bitcoin to have value is for enough people to believe it.
The code isn't perfect, of course. If it were, hard forks would never have been needed. But Fidelity Digital Assets has an answer to this too. Bitcoin may not be immutable, but its community is.
Many people have commented on the cult-like nature of Bitcoin. Network effects are particularly strong in cults, and cults members' incentives are not necessarily financial.
True believers get involved in bitcoin and actively trade even when the price is catastrophically falling. So the bitcoin faith is what gives bitcoin its value. If they were to lose that faith, the value of the currency would drop to zero. But is their faith alone enough to warrant an evolution to bitcoin as the leading medium of exchange and global reserve currency?
