Bitcoin is not backed by gold or government, so where does it’s value come from? Why choose Bitcoin over Dollars? Why choose Bitcoin over any other form of money? First, let’s examine why civilization invented money in the first place.

The History of Money

This video explains why money exists as a basic social need to keep track of debts.

The Value Of The Dollar

To get a better understanding of how Bitcoin derives its value, let’s compare it to something we already know – the dollar. This video explains how the dollar gets it’s value. So we find that the dollar’s value is derived from the policies of central banks and government. This is known as “fiat” money.

Not only that, the dollar is backed by a government that forces its citizens to use their currency for commerce and to pay taxes (unless you want to go to jail).

Bitcoin Is A Currency Of Choice

Bitcoin is a stateless and non-violent currency.

“Stateless” because it is a global currency, not restricted by artificial borders.

“Non-Violent” because people are not forced to use Bitcoin as a currency – it is their choice.

When government has the power to print an unlimited amount of money, it also has the power to fund endless wars.

Paul Krugman, American economist who doesn’t like Bitcoin and winner of the Nobel Memorial Prize in Economic Sciences, illustrated the use of force in our current economy by flatly stating:

“Fiat money, if you like, is backed by men with guns.”

Bitcoin Is A Deflationary Currency

Bitcoin has a fixed monetary supply where just under 21 million bitcoins will be created. No bank, individual or government can increase the supply of bitcoin under any circumstances. Bitcoin’s monetary supply is set in stone (well, set in code).

What this means is that Bitcoin, ultimately, is a deflationary currency. As time marches on, holders will be able to purchase more goods for their bitcoins due to their limited supply.

In contrast, inflation means you will suffer reduced purchasing power as time goes on, as is the case for the dollar. Deflation is not a foreign concept. The best example is with computing.

Moore’s Law Illustrates Deflation

Moore’s law is the observation that the number of transistors that can be packed into a computer chip doubles approximately every two years. Put another way, a computer chip’s speed doubles every 2 years for the same manufacturing cost.

We can also say that the price of computer chips of the same speed halve every 2 years.

Computer chip manufacturing has a deflationary cost basis. Essentially, we get more power for the same cost over time. Bitcoin is also deflationary in the sense that we can purchase more goods for the same cost over time if Bitcoin’s price increases due to the effects of supply and demand.

Bitcoin’s Price

Bitcoin’s price is derived purely from free market dynamics. That means, bitcoin’s price is the result of changing supply and demand levels in the market. If more people want bitcoin, the price goes up. If less people want bitcoin, the price goes down. Many people believe Bitcoin would create a fairer economy, as opposed to an economy manipulated in secret by men perched on top of their golden thrones.

Bitcoin Is Backed By Computing Power

A core component of the Bitcoin network are the single-purpose computers that verify transactions, known as “miners”. The incentive structure built into the Bitcoin Core code ensures that miners are paid (in bitcoin) for the work they perform.

These miners (tens of thousands of them) are the backbone of the Bitcoin network. The hardware alone amounts to hundreds of millions of dollars of investment into the infrastructure of Bitcoin.

The computational speed of the Bitcoin network is greater than all of the world’s supercomputers – combined! There is tremendous value in the infrastructure of the Bitcoin network.

… and finally

YOU give Bitcoin its value.

WE give Bitcoin its value.

EVERY USER of Bitcoin contributes to its value.

The greater number of people using Bitcoin increases the value of Bitcoin itself.

This is known as the Network Effect.

For example, the more people who own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase a telephone without intending to create value for other users, but does so in any case. Online social networks work in the same way, with sites like Twitter and Facebook becoming more useful as more users join.

That’s why buying bitcoin makes YOU valuable and strengthens Bitcoin’s value for everyone else as well.