Bitcoin is an efficient way to transfer money over the Internet and is controlled by decentralized networks with a set of specific rules, so it can be considered an alternative to Fiat currencies (currencies) controlled by the central bank. Continued with reference to an essay From the Enostopedia encyclopedia, we answer the question of what the value of bitcoin depends on.
It is better to start from the beginning. Bitcoin and other digital currencies have been introduced as an alternative to common national currencies. But where does the value of these common currencies come from?
Why are currencies valuable?
A currency can be used if it is a store of value. In other words, it must be ensured that its value in society is not zero. Many societies throughout history have used precious goods or metals as a means of payment because of their relatively stable value. Instead of carrying large quantities of cocoa beans, gold, or other primary currencies for trading, communities eventually decided to use new currencies as an alternative. However, the usability of many primary currencies, their reliability, and the fact that they are made from long-lasting, low-risk metals associated with depreciation continue to be used.
In the modern age, new currencies are often shaped اسکناس They have realized that their true and intrinsic value is not as great as the old coins made of precious metals. Of course, most people now make their payments via the Internet, or electronic currencies, which are like banknotes, except that they are created by governments on computer servers instead of being physical.
Banknotes once had a gold backing. That is, as much money as the government printed was stored in the gold treasury. But since the United States withdrew from the Gold Standard Act in 1970, it has been almost 50 years since almost all existing government currencies have no backing, hence the name Fiat (meaning unsupported). Fiat currencies are offered by the government and are not backed by any commodity.
The value of a Fiat currency is only because people who trust a country, government or government use that currency for their exchanges. In fact, under the contract, the individuals and governments of the parties to the transaction accept one thing as currency. If the people of the world decide not to use a currency, it becomes completely worthless.
Rarity, divisibility, application, and transferability
A successful currency, apart from the question of whether it is a store of value or not, must have the characteristics of scarcity, divisibility, applicability, transferability, stability, and forgery. But what do these concepts mean?
Maintaining the value of a currency depends on its supply. Excessive supply and printing of money can cause a sharp rise in commodity prices, which is called “inflation.” Low money supply can also cause economic problems, which is called “negative inflation”. School Moneymaking A concept of macroeconomics that aims to address the role of money supply in health and growth (or the role of scarcity) in a society’s economy.
When it comes to Fiat currencies, most governments around the world are turning to money printing to control scarcity. Governments deliberately create inflation to sustain economic growth and devalue money by printing more money. In the United States, for example, the rate has historically fluctuated around 2 percent. Of course, over-inflation, like what is happening in Venezuela, is causing economic collapse.
Currencies can be divided into smaller units. Thus, for a single currency system to function as a means of trading between a variety of commodities and values in an economy, it must have the flexibility associated with this divisibility. Currency must be sufficiently divisible to meet the value of any goods and services offered throughout the economic system. For example, the dollar itself is divided into smaller units called cents.
A currency must be used to influence society. People should be able to use currency units to pay for goods or services with complete confidence. This is the first reason for the spread of currencies in the first place; In this way, the participants in this matter can avoid direct and barter transactions for the goods. The application also provides easy movement of currencies from one place to another. Precious metals and commodities have problems in providing this feature.
Currencies must be easily transferred between members of an economic community to be functional. In the case of Fiat currencies, this means that the currencies must be transferable in a country’s economy as well as in the international economy through exchanges and related markets.
A currency must have the minimum characteristics of stability. Today’s coins or banknotes are made of materials that are not very suitable for this feature; Because they are easily torn, damaged, destroyed, or degraded and unusable over time.
Just as a currency must be stable, it must be difficult to counterfeit in order to remain effective. If this is not the case, criminals can easily disrupt the currency system with counterfeit banknotes, thereby negatively affecting the value of the currency.
Now let’s take a look at Bitcoin:
Bitcoin compared to Fiat currencies
What is the position of Bitcoin compared to common currencies?
When Bitcoin was introduced in 2008, its developers stipulated in the currency protocol that only 21 million bitcoins would be created. The current supply of bitcoins is about 18 million units, the bitcoin release rate is reduced by almost half every four years, which is called Halving, so the supply of bitcoins in 2022 should be over 19 million, of course in Assuming the Bitcoin protocol does not change. Keep in mind that changing the protocol requires the unanimity of more than half of the network processing power involved in bitcoin mining; Hence, on paper such an event is possible, but in practice it is far from the truth. Most governments, as part of their fiscal policies, consider flexible controls over the supply of currency in circulation and adapt them depending on economic factors.
This is not the case with bitcoin. So far, the continued supply of bitcoin units has created a vast and powerful community of miners, although this trend can be reversed as it approaches the 21 million coin threshold. It is difficult to say exactly what will happen at that time; One assumption is to imagine that the United States government suddenly stopped producing new banknotes. The last bitcoin will not be mined until around 2140. In general, scarcity can increase value. This is the same thing that happens with precious metals like gold.
21 million bitcoins is much less than Fiat currencies circulating around the world. Bitcoin is divided into up to 8 decimal places. The smallest unit is 0.00000000001 bitcoins called “Satoshi”, which is named after the creator of the bitcoin, Satoshi Nakamoto.
A bitcoin is more divisible than a US dollar or other Fiat currency. While the US dollar can be divided into cents or one-hundredth of a US dollar (USD), a Satoshi is one hundred millionth of a bitcoin (BTC). This extraordinary fragmentation makes bitcoin scarce possible; If Bitcoin continues to rise in price over time, users with a portion of a bitcoin unit can still participate in daily exchanges. Without divisibility, assuming the price of each bitcoin is $ 1 million, it will be impossible to use it in most transactions.
One of the interesting things about Bitcoin is that it uses Blockchain technology. Blockchain is a distributed head office system that eliminates the need for trust between the parties; This means that neither party involved in bitcoin transactions needs to trust each other. This trust already exists in the system due to the complex system of reviews and approvals in the distributed Bitcoin general ledger as well as the system for creating new bitcoins. Most importantly, the flexibility of blockchain technology is that it is also useful outside of digital currencies. Bitcoin can be used as a currency and payment method. Of course, there are challenges to this, which we will explain below.
Thanks to currency exchanges, wallets, and other tools, bitcoins can be transferred between parties in minutes, regardless of the volume of exchanges at a very low cost. Although it may not make much sense to use bitcoin for small payments in the current situation and credit card systems have a better position, for large transfers, bitcoin has a lot to say. One can easily buy ten thousand dollars of bitcoins and send these bitcoins to a person in Japan without the need to use the banking system and without worrying about the transaction being blocked or returned.
The process of transferring large sums of money in current systems can be time consuming and the costs of such transfers are sometimes very high. Portability is a very important feature of a currency.
One of the most important issues for physical Fiat currencies is stability. A banknote, while durable, can be torn, burned, or eventually misused. Digital payment samples are not prone to these physical damages. Because of this, bitcoin is extremely valuable. Bitcoin is not destroyed like a banknote. On the other hand, bitcoin is obviously never lost. If a user loses their cryptographic key, Bitcoin will be permanently unusable in the wallet. However, that bitcoin is not lost and is still found in Blockchainchain data.
Thanks to the decentralized and complex bureaucracy system of Blockchain, bitcoin forgery is extremely difficult. Doing so essentially requires fooling all participants in the Bitcoin network. The only way for someone to counterfeit bitcoin is through what is known as “re-spending.” Re-spending refers to a situation in which a user spends or transfers some bitcoin in two or more separate situations; In other words, this user generates duplicate data and transmits it over the network. If this is not a problem for common currencies, because it is impossible to use a physical banknote in two places at the same time. But such a thing, paper day, is possible for digital currencies.
What makes re-spending impossible is the size of the bitcoin network. To spend again, a so-called 51% attack will be required. In this attack, the attacker or attackers must have at least 51% of the network processing power. By controlling the majority of network power, this group can dominate the rest of the network to forge records. However, such an attack on the Bitcoin network requires a lot of effort, capital and computing power. There are very few resources available.
Overall, Bitcoin is in a relatively good position compared to Fiat currencies. So what are the challenges against Bitcoin as a currency?
One of the biggest issues ahead is saving the value of this digital currency. The use of Bitcoin as a store of value depends on its use as a payment tool. If Bitcoin does not act as a successful trading tool, it will have no use and therefore will have no value in the long run and will not be considered as a store of value. If we continue to see an increase in bitcoin acceptance, its price will be more stable; Of course, it is not possible to say with certainty what will happen in the future.
The use and portability of bitcoin faces challenges due to storage problems and exchange issues. In recent years, digital currency exchanges have been plagued by hacking, theft, or fraud. Of course, theft also happens in the world of Fiat currencies. While, in these cases, many rules are set; This helps to compensate for the damage caused by such cases. When it comes to legislation, lawmakers look at bitcoin and digital currencies as areas of lawlessness. Different governments have different views on bitcoin, and believe that the consequences of choosing bitcoin as a global currency are enormous.
The manipulation of the bitcoin market is also one of the main challenges of this digital currency. The bitcoin market is still very small compared to traditional markets, and rich and influential people known as “whales” can steer the market to where they want by building a news bomb or placing large orders. The only thing that can overcome this challenge is the time and expansion of the bitcoin market. The bigger the bitcoin market and the more regulations it imposes, the less manipulated it will be.
The value of bitcoin comes from the value of other currencies. People have accepted the value of bitcoin among themselves, and thus with the demand for bitcoin, its value increases. Bitcoin also has unique features that contribute to its popularity as a value storage or value transfer tool. Solving Bitcoin’s current challenges can help increase its value, and conversely, if Bitcoin fails to adapt to future technologies, it will lose its value.