Understanding the economics of Bitcoin

Understanding the economics of Bitcoin

How does bitcoin work? Why does it have value? This article answers these and other questions related to the economics of Bitcoin.

Although Bitcoin is now about 13 years old, many questions, speculations, analyzes and arguments are ongoing. Of course, Bitcoin is now a popular household name. But apart from those who use it or are part of its more extensive network, not many ordinary people understand the economics of Bitcoin.

What is this?

For a start, Bitcoin is just a digital currency. Just like the dollar or other fiat currencies, you can use bitcoin as a method of payment. However, unlike fiat currency, Bitcoin does not have a physical status. Additionally, while governments through central banks control fiat currency centrally, Bitcoin is decentralized with no single controlling entity.

Bitcoin is also a digital asset that some consider “digital gold”. This is due to the rising value of Bitcoin as an investment asset. Bitcoin trading is a profitable business. You can also trade in many cryptocurrencies through Bit codesYou can also trade Bitcoin through many cryptocurrency trading platforms.

Bitcoin value

The best place to start understanding the economics of Bitcoin is its value. Two questions will direct this. First, does Bitcoin have value? Second, assuming Bitcoin has value, what explains that? Let’s answer each question below.

To the first question, the answer is yes. Bitcoin has value. This is true because Bitcoin has a price that determines its value. Although the price is volatile, it still means that Bitcoin has value. For example, the cost of Bitcoin on September 12, 2022 is about $22,000. The price may change at any moment and then rise or fall. Just the fact that Bitcoin has a price means that it has value.

Additionally, on the question of whether Bitcoin has value, it is valuable because it also serves as a store of value. You can buy Bitcoin and keep it as a store of value. Instead of keeping the paper money in the bank, you can decide to convert it to Bitcoin. This means that Bitcoin retains its value although due to high price volatility, the value can change at any moment.

Regarding your second question, Bitcoin has value due to its scarcity and use. The maximum supply of bitcoin is 21 million coins. After this maximum is reached, there will be no more bitcoins. Already, more than 90% of this is reserve. Therefore, as the supply of Bitcoin continues to decline, the demand continues to grow.

In addition, Bitcoin is difficult to counterfeit due to its blockchain technology. Blockchain creates a decentralized and distributed digital ledger without a single central control or management. Anyone on the Bitcoin network can see and verify every Bitcoin transaction. With millions of miners on the Bitcoin network, it is virtually impossible to double the spend.

Bitcoin as a method of payment

People use bitcoin as a means of payment. Like the dollar or the euro, people can use it to pay for goods or services at many retail outlets. Many retailers accept Bitcoin payments. They do it because they know it has value. If it lacks value, no retailer will take it as payment.

Although Bitcoin is not accepted as a payment method as everywhere as fiat money, this does not mean that it lacks value. We must realize that Bitcoin is very old, unlike very old fiat money. Therefore, many people may not know it or understand it well. However, with the increasing trend in digital payments, Bitcoin will become widely accepted as a payment method.

away

The economics of bitcoin is simple. It is primarily about its value and use. To better understand Bitcoin, you need to understand the underlying blockchain technology and how it works.

Image by Petre Barlea from Pixabay

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