Why Do Bitcoins Have Value?

A bitcoin has value because it can be exchanged for and used in place of fiat currency, but it maintains a high exchange rate primarily because it is in demand by investors interested in the possibility of returns.

Of course, many other factors influence Bitcoin's value. Read on to learn more about why Bitcoin has value.

Why Traditional Currencies Have Value

Throughout history, many items have been used to exchange value—such as shells, beads, animal skins, and precious metals. In this respect, these items are regarded as "money." Money doesn't have to be the printed currency we are all familiar with—all it needs is to act as a store of value, be recognizable as a unit of account, and be accepted as a medium of exchange.

So, if an item meets those criteria, it is money. However, to be successful and long-lasting, it must have:

• Scarcity: It must not be a widely available resource
• Divisibility: Currency should have many denominations
• Acceptability: The intended audience must accept it
• Portability: It must be able to be carried around and exchanged
• Durability: Currency should have a long life span time
• Uniformity: All denominations should be identical and not easily reproduced

Value is then assigned by the users based on its supply, demand for the currency, how much it is worth to them, and how much of a given good or service it can purchase.

The image below compares many different value attributes of gold, fiat, and crypto.

Why Does Bitcoin Have Value?

Cryptocurrency displays the same attributes a fiat currency system does. Here's how it meets them:

• Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
• Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis.
• Acceptability: More and more people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them because their financial systems are failing them. Businesses are accepting them in greater numbers, and more consumers are using them.
• Portability: Bitcoin can be used across borders, allowing any consumer with an internet connection to participate in the global economy and access financial services.
• Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
• Uniformity: Bitcoins cannot be counterfeited and don't have a physical appearance, although there are renditions of coins that represent Bitcoin.

As Bitcoin has also become accepted as a medium of exchange, stores value, and is recognized as a unit of account, it is considered money.

But its exchange rate, the value most often associated with the coin, isn't so much a factor of the people who use bitcoins in transactions; it's investors buying the cryptocurrency hoping for profits and traders buying and selling it to make money on price movements.

Because it is in demand by investors (realistically, they are speculators because they are hoping for returns), Bitcoin commands a very high price, as demonstrated by the exchange rates it has experienced in the past. At one point, 1 BTC was valued at less than $1—more than one decade later, that same bitcoin would have been worth more than $75,000. Prices have varied wildly since Bitcoin was introduced, but this volatility has many hoping that the market will continue to feed an increasing value.

The Bottom Line

Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.