The invention of money as a medium of exchange was a vital step in the emergence of today’s complex economical systems. Starting from the pre-historic stamped coins of Babylon, to today’s fiat currencies like the USD, INR, EUR and others has been an evolution nearly 4,000 years in the making.
For many, the next step in this economic evolution is the advent of cryptocurrencies. The development of Bitcoin, a decentralised, inflation-resistant, digital currency that can be used by individuals just as simply as other fiat currencies in 2010 harkened the start of the cryptocurrency era.
But while countries today struggle to regulate or completely ban cryptocurrencies like Bitcoin, many are still questioning the mechanics by which Bitcoin has risen to its current price of $48,521.
Who gives value to currencies?
Currency used to be minted in the form of minted precious metals like gold and silver coins and then transformed into paper money that represented ownership of a number of precious metals later. The gold standard for currencies, where currencies were pegged against the value of gold, was then abandoned in the second half of the 20th century.
Today's currencies are known as fiat currencies, as their value is entirely derived from the people's trust in the issuer of the currency to honour its promise. Essentially, a Rs 100 note is worth Rs 100 because individuals across the world believe that the Reserve Bank of India and the government of India will treat its worth as Rs 100.
The value of fiat currencies that nations use is also governed by a few different factors, but since they are issued by the central bank of a country these factors can more or less be changed. Each currency has six attributes -scarcity, divisibility, utility, transportability, durability, and counterfeitability, which a central bank can adjust to determine the value of a currency.
Who gives value to Bitcoin?
Unlike fiat currency which is issued by a central authority, Bitcoin is a decentralised and digital representation of money. While Bitcoin does have some of the attributes of other fiat currencies, its main failure against other fiat currencies is the utility attribute. Despite being slowly adopted by various payment platforms, Bitcoin is still not used in the same way as fiat currency is because of its limited usage.
So it is not a central authority that is driving the value of Bitcoin.
Instead, it's possibly a confluence of factors. It is not yet completely understood which, if any, of these factors are the predominant factors responsible for the value of Bitcoin. Bitcoin’s scarcity, only a limited number of Bitcoin’s can be mined, Bitcoin’s cost of production (the cost of electricity to mine a single Bitcoin), the belief of Bitcoin’s supporters in its underlying use and technology, and pure speculation are some of the factors that experts believe that are driving Bitcoin’s value.
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Depending on who is answering the question, Bitcoin’s real value may be noted as zero or as much as half a million dollars. Only time will tell, what the true value of Bitcoin is going to be and whether it is going to be the next evolution in currency or just one more financial bubble doomed to burst.