Cashless mode of payment is one example for The Network Effect. Network effect in economics suggests that the value of a good increases with more number of people utilizing it.
Though daily transactions done digitally are swift, the same cannot be said about large transactions or overseas transactions. Such transactions are time-consuming and are subjected to a highly volatile exchange rate. Cryptocurrencies solve these problems with its decentralized infrastructure making direct money transfers quick, traceable, transparent, and immutable. Complying it to the principles of the network effect, cryptocurrencies will get more value as adoption increases. Having a single phone is pretty useless as no calls can be made through it.
But as soon as the number of phones increases, the value increases exponentially. Hence, with Bitcoin, adoption is the factor which will play the leading role in adding value to it. Scarcity means a finite supply of goods or services. Bitcoin and many cryptocurrencies are limited currencies. That means, there is just a finite number of the same available. Bitcoin, for instance, has set a cap of 21 Million Bitcoins. Analysts note that this scarcity feature of Bitcoin increases its desirability over other assets including gold.
A sudden influx of supply will crash prices and may hurt overall markets. Keeping in mind the cashless mode and a few other factors which make up a fiat currency, let us think about Bitcoin and other cryptocurrencies. It is purely digital in nature. It automatically brings all the benefits of Digital mode of transactions, in addition to that, the time taken to complete the transaction is far less. Bitcoin comes with the security of Blockchain which makes it difficult to counterfeit or to play around with. Another point here is that Bitcoin has a cap of 21 million units out of which The program used to create or mine bitcoin will simply stop once the set number is achieved.
This makes Bitcoin accountable in itself.
Why Do Bitcoins Have Value?
As mentioned above BitCoin has a value in itself. It is free from the worry of finding an appropriate store of the value that is there inherently in Fiat money. Adding to this, Today a cryptocurrency gets its utility as a mode of payment due to two key factors — Transaction Costs and Transaction Time. Cost to transfer a cryptocurrency like Bitcoin is near minimal as the number of parties involved is technically only two.
This reduces the overall cost of transactions significantly. With the added security layer provided by Blockchain, this is perhaps the safest way to transfer value digitally. Compare this with days with traditional fiat currencies.
- Arguably, Bitcoin serves none of the functions ‘money’ does, so why is it so valuable?.
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A global e-commerce major like Amazon , which has millions of transactions in a day globally cannot afford such high costs as well as cash-flow challenges. Hence, today globally, many companies have started collecting payments using Bitcoin or similar cryptocurrencies. As seamless as, the change has been from the traditional mode of exchange to electronic mode, Cryptocurrency has the potential to be as swift and seamless in adoption and as more and more people will accept it, its value will increase.
It will be a strong alternative to money and has the potential to become a truly global currency. Beginning his journey in the world of business at the age of eight, Sumit showed an early proclivity for entrepreneurship, selling video games for profit in his hometown. When bitcoin began gaining traction in , Sumit saw the potential of leveraging blockchain technology to enable financial inclusion. Sumit also founded ListUp, one of the first e-retailer companies with a location-based app.
Under his leadership, ListUp had grown into a multimillion dollar business within one year. It does not need an extra source […]. Leave A Reply Cancel Reply. Save my name, email, and website in this browser for the next time I comment. Then What Gives Bitcoin Value? Guest Authors. By Sumit Gupta On Feb 14, A Guide to the Economics of Bitcoin. What is a Fiat Currency? Related Posts. Mar 27, Despite being digital, DCEP is strictly speaking not a cryptocurrency. Legal tender status is usually given to means of payment that can be easily transferred and used by the population in daily life.
To use bitcoin, or cryptocurrencies, a digital infrastructure including computers, smartphones, internet networks and connectivity must be in place. This condition makes it unrealistic for cryptocurrencies to become money. Bitcoin supporters say it is an investible asset. Investible, yes in the speculative sense, in my view. Asset, I am not sure. There is an income stream associated with a financial asset. Granted, there are assets with a zero yield such as commodities, but they are traded because they have a practical use for production or consumption.
Hence crypto prices are subject to violent and random movement. This brings up the other problem, store of value. For something to serve as a store of value, it has to be liquid, universally accepted, and have a stable value. Cryptocurrencies including bitcoin certainly do not have any of these characteristics.
It would therefore only take a few whale wallets to manipulate the bitcoin market, causing violent price moves. Huge price volatility has made bitcoin and cryptocurrencies unsuitable as store of value vehicles. Contrary to the conventional wisdom that the finite supply of bitcoins and cryptos is a benefit and protects value, it is in fact a big problem for them being considered as money. The maximum number of bitcoins that can ever be mined is 21 million.
“Bitcoin Has No Intrinsic Value”. Then What Gives Bitcoin Value?
At the time of writing, there are already The last bitcoin would be mined in All cryptocurrencies have a finite supply and the speed at which they can be increased is uncertain and not controllable by anyone. These supply limitations make cryptocurrencies unsuitable as legal tender because the static 'money supply' would deprive central banks of the ability to conduct countercyclical policy.
They have skillfully twisted this supply problem into an argument for cryptocurrencies as a hedge against doomsday scenarios. I believe this is wrong.
China, which used to be the largest crypto mining country, has seen through the smoke and mirrors and has cracked down on trading and mining without reservation. This shows how quickly regulators could destroy the freewheeling, decentralised crypto market. China instead has created an official DCEP with centralised control. What crypto aficionados do not appear to understand is that countries will take steps to protect their monetary systems and currencies and their ability to tax and manage the economy.
A functional and decentralised digital currency
The more people believe cryptocurrencies are money, the greater the risk of government intervention in this market. The emerging trend of official digital currencies is a sign of central banks fighting back. Thus, the rise of cryptocurrencies can be seen as reflecting the anti-establishment movements in many countries since the GFC.
Viewed positively, this 'crypto protest' could prompt governments to change their economic management to become more responsible and regain trust and credibility. Time will tell. I believe crypto prices will eventually crash.
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This could be triggered by a shift in monetary policy or regulations. Alternatively, a crash could simply occur because prices are so inflated that much like the Dutch tulip mania, marginal buyers are priced out of the market, leading to a self-feeding process of liquidation and falling prices when leveraged investors start to sell.