The invention of money as a medium of exchange was a vital step in the emergence of today’s complex economic systems. From prehistoric stamped coins from Babylon to today’s fiat currencies like USD, INR, EUR and others, there has been an evolution of almost 4,000 years.
For many, the next step in this economic development is the advent of cryptocurrencies. The development of Bitcoin, a decentralized digital currency that is resistant to inflation and can be used by individuals just as easily as other fiat currencies in 2010, marked the beginning of the cryptocurrency era.
But as countries today struggle to regulate or completely ban cryptocurrencies like Bitcoin, many still wonder about the mechanisms by which Bitcoin reached its current price of $ 48,521.
Who gives value to currencies?
Currency was once minted in the form of minted precious metals like gold and silver coins and then turned into paper money which later represented the ownership of a number of precious metals. The gold standard for currencies, where currencies were pegged to the value of gold, was later abandoned in the second half of the 20th century.
Currencies today are known as fiat currencies because their value is derived entirely from people’s trust in the issuer of the currency to honor its promise. Essentially, a Rs 100 note is worth Rs 100 because people all over the world believe that the Reserve Bank of India and the Indian government will consider its value to be Rs 100.
The value of fiat currencies that nations use are also governed by a few different factors, but because they are issued by a country’s central bank, those factors can be more or less changed. Each currency has six attributes – scarcity, divisibility, utility, transportability, durability, and counterfeiting, which a central bank can adjust to determine a currency’s value.
Who gives value to Bitcoin?
Unlike fiat currency issued by a central authority, Bitcoin is a decentralized, digital representation of money. While Bitcoin has some of the attributes of other fiat currencies, its main downfall compared to other fiat currencies is the utility attribute. Although slowly being adopted by various payment platforms, Bitcoin is still not used in the same way as fiat money due to its limited use.
It is therefore not a central authority that determines the value of Bitcoin.
Instead, it may be a confluence of factors. It is not yet fully understood which, if any, of these factors are the main factors responsible for the value of Bitcoin. The scarcity of Bitcoin, only a limited number of Bitcoin can be mined, the cost of producing Bitcoin (the cost of electricity to mine a single Bitcoin), the belief of Bitcoin supporters in its underlying use and technology , and pure speculation are some of the factors which experts believe determines the value of Bitcoin.
Depending on who answers the question, Bitcoin’s actual value can be noted as zero or up to half a million dollars. Only time will tell what the true value of Bitcoin will be and whether it will be the next currency evolution or just one more financial bubble doomed to burst.