One of the greatest questions around bitcoin’s possible mainstream adoption is the perceived lack of intrinsic value. Since bitcoin is only some numbers stored digitally, it has no intrinsic value. Thus why should people use and transact in bitcoin? Some bitcoin proponents argue that bitcoin does have an intrinsic value, because it is “backed by mathematics”. However, such an argument does not sound convincing to the average person. Mathematics cannot feed you or take responsibility in any way. So does bitcoin have an intrinsic value? Or is it really just some worthless digital numbers that will go out of fashion?
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To answer this question, we must first look at just what is intrinsic value? How does intrinsic value translate into market value? To answer these questions, we first look at some things that intrinsic value. Water has intrinsic value. Without water, no living creature can live. We all need to drink water in order to survive, therefore water is valuable. Similarly, we all need food to survive, or we would starve to death. Music also has intrinsic value. Though we don’t need music to survive, most of us get great enjoyment from listening to music. It makes us happy. From these examples, we can see that something with intrinsic value gives some sort of a benefit by itself, without having to be traded with other items. This does not mean that something intrinsically valuable has to be valuable to every single person; it could be only intrinsically valuable to a certain group of people. For example, not everyone finds diamonds beautiful or desirable. Yet diamonds have a high value because certain groups of people find it to be very attractive and desirable.
So how does intrinsic value translate into market value? Clearly there are a lot more people who need water than diamonds. So why are diamonds valued so much higher than water? The answer is quite obvious; it is because diamonds are a lot more scarce than water. There is enough water to go around for everyone, but diamonds are considerably more difficult to obtain. This is why diamonds have a higher market value than water. So we can establish that the two main factors in determining the value of something is whether it gives some sort of benefit by itself, and its scarcity.
Going back to bitcoin and currencies, how does bitcoin compare? Bitcoin’s two main rivals are gold (and by extension other precious metals) and government backed fiat currencies. First of all, let’s look at gold. Gold has some intrinsic value, because many people consider it attractive and desirable. Gold can be made into jewelry. Gold also has a few industrial applications. Gold is also relatively scarce. Our technology is far from being able to extract gold from outer space, and there is only a limited amount of gold available on the Earth, and a lot of it is very difficult to extract, and would not be cost effective. Government fiat on the other hand, does not really have much of an intrinsic value. You can’t eat the paper bills nor the coins, and they’re not particularly good decorations either. It is also not particularly rare; governments can and do print huge amounts of “money” every year. However, one reason government backed fiat money is valuable, is because you must use them to pay taxes. Usually businesses are also obligated to accept the local currencies for their business. As some would say, fiat money is backed by “men with guns” forcing you to use it. While that might be a little extreme, that is where the value of government money comes from.
What about bitcoin? Well, bitcoin’s scarcity is easy to see. There will only ever be approximately 21 million bitcoins in existence. If we were to split those 21 million coins between the world’s population, each person would have less than 0.003 bitcoins! But the question comes back to, does bitcoin have intrinsic value? Can bitcoin be useful by itself, without being exchanged for something else? The answer is a big YES, bitcoin definitely has intrinsic value. Bitcoin is not just a currency, it is an evolving technology platform. Tens of thousands of developers around the world are building applications on top of the bitcoin blockchain, some are finance related, some are completely unrelated to finance. These developers have already built companies that have received a billion dollars in Venture capitalist funding, and more and more are getting financial backing from some of the largest technology investors in the world. At its core, the blockchain is a decentralized ledger that can be used to store data.
In essence, it can be used as a new type of database. It’s easy to see the value of that; Oracle, just one company with a focus on databases has a market cap of 170 billion dollars USD. But bitcoin goes beyond being a database. It can also be used as a very secure way to transfer ownership. One of the biggest and most exciting areas of development in the bitcoin space is smart contracts. These are computer facilitated, verified and enforced contracts that does not require a lawyer or notary, which can potentially save billions of dollars for users.
Bitcoin, like the internet itself, is a platform, a tool in which people can build applications and value on top off and share with the rest of the world. Even without its use as a currency, the bitcoin platform can bring and create a huge amount of intrinsic value for the world.