Understanding the Underlying Value of Bitcoins

Journalist:
Kyle Torpey @kyletorpey
March 16, 2014
Publishers using the Bitcloud network will need to pay in cryptocurrency.

Understanding the underlying value of bitcoins is rather difficult right now because there aren’t many places where you have to use Bitcoin to make a payment. For example, one of the main reasons local fiat currencies have value is that the citizens of that country have to use the national currency to pay their taxes. When you have to use a certain currency to make a payment, it gives that currency value in the eyes of the people. Although there are already a few instances where you have to use Bitcoin to make certain kinds of payments, this aspect of the Bitcoin network is going to grow exponentially in the near future. Critics often state that bitcoins don’t have real value as money because they aren’t backed by a government or a physical commodity, but that point of view could be completely destroyed in the near future.

Bitcoin for Financial Privacy

While this is an aspect of Bitcoin that some digital currency enthusiasts try to avoid, the reality is that the aspects of Bitcoin that enhance financial privacy are one reason that it has value. If you’re going to purchase drugs off the Internet on one of the many dark web marketplaces, then you basically have to pay with bitcoins. This is the same reason that cash is more valuable to local drug dealers than a customer with a credit card. For the purposes of this article, it’s not really important to look at whether or not it’s immoral to use Bitcoin to buy drugs, avoid taxes, or participate in other illegal activities. The fact of the matter is that Bitcoin’s potential on the digital black market plays at least a small role in creating demand for the currency.

Merchant Discounts

While discounts for payments in Bitcoin will vary from merchant to merchant, it’s important to note that sometimes consumers will need to use Bitcoin if they want to get the best price at a restaurant or convenience store. International businesses can also benefit from accepting Bitcoin for payments, and business owners who understand the value of Bitcoin may even take extra steps to promote the digital currency to their customers. There are plenty of transcontinental businesses that are paid with bank wires, Western Union money transfers, and other expensive payment options. Whether you’re talking about a small corner store that wants to avoid paying 30% of a Snickers bar sale to Visa or an international business that doesn’t want to pay for currency conversion charges, there are definitely plenty of reasons for merchants to promote Bitcoin and pass those savings onto the consumer. Consumers can already get a 3% discount when they purchase a gift card from Gyft with bitcoins, and this trend is likely to continue as more merchants hop on the Bitcoin bandwagon.

New Services Will Require Bitcoin as Payment

This final point is the most important explanation as to why Bitcoin has value. When it comes to the new cryptographically-secure protocols of the future, most of them are going to incentive users of their platforms with cryptocurrency payments. Bitcloud is a project that aims to provide storage on a distributed database, and the only way the Bitcloud network can act as an escrow agent is if bitcoins or some other cryptocurrency are used for payment. If you want to connect to the mesh network of the future, such as Open Libernet, then you’ll need to pay for access to the network with automatic Bitcoin payments. At the recent Bitcoin Hackathon in Austin, Texas, there was even a project put together that wants to give Tor relays a financial incentive to route traffic through the network with proof of bandwidth. These are the kinds of developments that show the true power of the bitcoin as a currency. Bitcoin is programmable money, which means it can be used in ways that simply are not possible with dollars, gold, or other types of “real world” currencies.

The Unique Properties of Bitcoin

At the end of the day, the unique properties of Bitcoin are what give it real value. The only way a currency can establish itself in any market is if it has a few competitive advantages over whatever else is being used as money at the time. There’s a reason gold, silver, and other precious metals were preferred as money for thousands of years, and there are certain properties of bitcoins that make it an attractive option for people who need to perform certain types of transactions.

Last modified (UTC): April 20, 2014 18:34

Kyle Torpey @kyletorpey

Kyle is a freelance Bitcoin writer and the Marketing Director for Bitcloud. His work has been featured on Business Insider, VICE Motherboard, Let's Talk Bitcoin, and RT's Keiser Report . You can follow him on Twitter (@kyletorpey) or send him an email.