Posted in: Archive
September 22, 2014 9:53 AM UTC

What Determines the Value of Bitcoin?

Bitcoin's value is a perceived regard for its benefits and usefulness. The term value, as used here, is not to be confused with price, which is the monetary cost of a bitcoin. The usefulness and consequent value of Bitcoin is a result of many aspects…

Bitcoin’s value is a perceived regard for its benefits and usefulness. The term value, as used here, is not to be confused with price, which is the monetary cost of a bitcoin. The usefulness and consequent value of Bitcoin is a result of many aspects of its innovation, its network, and its features. This guide discusses the most important factors that lead its users to consider Bitcoin to be valuable.

Scientific Value

To the general field of Science, the Bitcoin innovation is valuable for having solved the long-standing Two Generals Problem (or Byzantine Generals’ Problem). Satoshi Nakamoto’s clever solution to the dilemma of digital double-spending is achieved via a self-organizing and time-based consensus record. The blockchain, a shared public ledger, is maintained by the peer-to-peer nodes that populate the Bitcoin network.

Technological Value

Because Bitcoin is decentralized via a distributed peer-to-peer network, there is no central server that the Bitcoin protocol depends upon for its existence. Like BitTorrent, Bitcoin is, therefore, censorship-resistant – it cannot be shut down. This aspect of Bitcoin is critical since it means that Bitcoin’s continued usage is not subject to any external authority’s approval, opinion or action. Being a censorship-resistant alternative to official currency and payment systems makes Bitcoin an irreversible disruptive technology.

Social Value

Satoshi Nakamoto’s innovations in the field of Computer Science are significant milestones. In addition, a social implication of the way Bitcoin innovates payment and transactions is that it eliminates Trust. A distributed ledger and decentralized network means that no single entity needs to be trusted in order for the Bitcoin protocol to function. Each Bitcoin user owns and controls their own money outright, and is solely responsible for its security and usage. No third party, such as a bank or centralized issuer, needs to be implicitly trusted to hold, disburse or maintain one’s bitcoin holdings. This trust-less dimension of Bitcoin eliminates the risks associated with having to trust external authorities – in fact, the network effect of Bitcoin’s decentralization will be to, over time, eliminate centralized authorities everywhere.

Token of Value

Although a bitcoin can be copied many times, it can only ever be spent once. This design feature can be verified by making a copy of an existing Bitcoin wallet to another computer. The same bitcoins will exist in two physical locations, but only the first spend transaction will succeed. The network will recognize a second attempt to spend the same bitcoins as a double-spend and reject it. This is the critical innovation that sets Bitcoin apart from all previous attempts at creating digital currency.

Bitcoin’s Design Value

With the solution to double-spending as its foundation, Bitcoin’s explicit design features offer users additional value:

1. Payment method (currency)
2. Storage of Wealth (secure storage and transmission)
3. Decentralized Public Transaction ledger (blockchain)
4. Contract Mechanism (mostly unused despite its vast potential)

In day-to-day usage, the first three applications of Bitcoin are pervasive and often overlap.

Secured Value

Bitcoin uses public-private key pairs to secure transactions. A Bitcoin address is a public key generated from a private key held in a user’s wallet. A Bitcoin transaction destined for an address generated by a wallet is signed with that address’s public key, and can only be “unlocked” (or spent) with the matching private key. Hence, Bitcoin transactions are secured against theft. The underlying mechanism that prevents double-spending secures Bitcoin against forgery.

Value in Development

Bitcoin is made available as Free and Open Source Software under the MIT license. Additionally, the protocol is also developed via the Open Source project model which encourages community contribution and collaboration.

Collaborative development of publicly available source code is considered to be preferable to closed source code developed by a contained team. Bugs and security fixes are identified and fixed quickly – and around the clock – while the principle of strength in numbers and diversity of skills allows greater productivity.

The Bitcoin Core Developers are mostly unpaid volunteers who maintain and manage the Bitcoin source code. If their work was any less critical and exciting, one could describe it as a “thankless task”, yet they represent some of the hardest working developers in the field. The coredevs contribute thousands of hours of code writing and rigorous adherence to Satoshi’s design specifications in order to translate the Bitcoin vision into reality.

Network Value

The Bitcoin network is a decentralized peer-to-peer network that, ideally, is both distributed and diverse. The more widely the peer-to-peer nodes are distributed, the more decentralized the network. The more diverse (non-similar) the nodes are, the broader the representation on the network and, hence, it is more resilient and secure. The Bitcoin protocol is designed to seek consensus amongst nodes, and greater decentralization means a healthier, more robust network. All of these factors contribute to a more valuable blockchain.

Miners Are Valuable

Bitcoin Miners are rewarded bitcoins for processing transactions into blocks. Mined blocks are typically appended to the blockchain, and become part of the public ledger. By processing transactions, building the blockchain, and hosting the peer-to-peer nodes that maintain network consensus, miners represent the backbone of Bitcoin’s distributed network. For their task of keeping the network functional at all times and maintaining the precious blockchain, miners (in a close tie with the developers) are the Bitcoin
protocol users who add the most value.

Value Transmission and Storage

The world’s reserve currency, along with most other national currencies, can be exchanged for bitcoins and stored or transmitted via the Bitcoin network. It seems to that, as the amount of money increases, so the benefits of using Bitcoin storage/transmission also increase.

Bitcoins in storage can be secured by different means, including passwords, biometric readers and multiple signature transactions. Although theft of, say, a password or human error can still result in loss of stored bitcoins, the risks are far less than in the case of physical assets such as paper money or gold bullion. Transmitting bitcoins via the payment network is cheaper and faster than transferring an equivalent amount via traditional channels, and less cumbersome and more secure than transporting an equivalent amount of bullion.


Contract and Application Value

Bitcoin Contracts are described by Satoshi Nakamoto, although this aspect of the protocol has found few applications to date. Contracts extend the multi-signature facility of Bitcoin by allowing two or more parties to engage in agreements that are fulfilled by events that are external to the Bitcoin network. Examples include Options Contracts, Wills and even simple binary bets such as the outcome of the Brazilian Women’s Volleyball match. In the future, this facility of Bitcoin will be better understood, used more frequently and add more value to the protocol.

The distributed blockchain is designed to accommodate alternate chains, thereby opening the door to applications that both use and enhance the Bitcoin protocol. These distributed applications will add value by making Bitcoin more useful.


We’ve seen how Bitcoin’s value cannot be reduced to one single element or feature. Many aspects of the cryptocurrency contribute to its usefulness and offer benefits that outweigh traditional paper money and its encumbent systems. As a decentralized network with a consensus-based ledger, the Bitcoin blockchain has features that are innovative and encourage further innovation. Bitcoin’s Open Source Software model facilitates additions and improvements.

The value of Bitcoin’s core function of being a payment, storage and accounting network is evident from the fact that users are willing to purchase bitcoins, transact in bitcoins and use its networked ledger. At the time of writing an average of 62,000 Bitcoin transactions are conducted daily with an average volume of $50mil per day.

Also read: What is a Bitcoin Whale?

Stay updated on Bitcoin Value news here.

Images from Shutterstock.

Last modified: January 25, 2020 10:03 PM UTC

Venzen Khaosan @venzen

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect. He has found a solution to the PKI mechanism. Email me to discuss.

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