Why does Bitcoin have any Value?

We’ll reach to this question below, but before doing that, can you take a closer look at this picture?

source http://www.mhs.ox.ac.uk/collecti…

Now, what do you see? It’s a stick made of wood. However, the interesting thing is that it was a form of currency for hundreds of years. And no, we don’t speak about some unknown civilizations – it happened in the UK up until the beginning of the 19th century.

Such tally sticks, as they are called, were issued by the Bank of England to facilitate the tax collection. The principle behind this system is described in the medieval text called “Dialogue concerning the Exchequer.” Here is what it reads:

“The manner of cutting is as follows. At the top of the tally a cut is made, the thickness of the palm of the hand, to represent a thousand pounds; then a hundred pounds by a cut the breadth of a thumb; twenty pounds, the breadth of the little finger; a single pound, the width of a swollen barleycorn; a shilling rather narrower than a penny is marked by a single cut without removing any wood.”

The National Archives | Treasures from The National Archives | Tally Sticks

These cuts were representing the value of the stick. When it was split into two, both pieces had the same notches to avoid counterfeiting – like this:

source A Medieval British Anti-Counterfeiting System: Split Tally Sticks – Core77

After the split, the longer part called “the stock” (from which the current term of “stock” gained a financial meaning) was kept by the taxpayer while the shorter piece was given to the Exchequer officials. When accounts were audited, both pieces had to match or to “tally.”

So – why did those sticks have value? Well, because everyone in a certain region agreed so.

Now, why does this paper (which is actually made of textile) have any value?

(100 USD bill)

It’s because you and I believe it to have. It’s because we believe the US government, which said that this particular form of currency has the given purchasing power. In reality, the US dollar is not backed by anything.

Even Jamie Dimon admitted that the USD is money out of thin air. He said it when he criticized Bitcoin:

“Creating money out of thin air without government backing is very different from money with government backing.”

Governments will close down bitcoin and cryptocurrencies if they get too big, warns Jamie Dimon

Well, he hinted that Bitcoin doesn’t have value because it’s not backed by any government. However, he is not right at all. Money can be anything – even the leaves if you want – but it has to possess the following key characteristics:

Wide acceptability, durability, portability, divisibility, uniformity, and limited supply.

Now, is Bitcoin accepted as currency? Yes – it is accepted in many regions of the world, and there are lists of stores, restaurants, hotels, and other service providers that accept BTC – you can google it.

Is Bitcoin durable? Yes – blockchain makes it almost unhackable, which ensures its existence in the long-term.

Is Bitcoin portable? Yes – using digital wallets and exchanging BTC is more convenient than exchanging gold. You can easily do cross-border transactions.

Is Bitcoin divisible? Yes – it can be split into satoshis.

Does Bitcoin have a limited supply? Yes – the supply is capped at 21 million, which more stable than the US dollar, the total amount of which is constantly increasing (money out of thin air).

So – Bitcoin’s value is just based on the natural supply/demand ratio. And the demand part comes from people’s belief and perception, the same as with the US dollar or with any other currency.

Leave Your Comment

Leave a Reply

X