Among the first mysteries is, why do these assets have any value? Bitcoin currently has a market capitalization of nearly 2 trillion dollars. (That’s the product of multiplying the number of outstanding coins by their value per coin, which is currently around $100,000.) It’s more than the market cap of Tesla stock but less than Amazon.
The current Bitcoin price has multiplied by 500 since 2015. Back then it was trading in the $200 range. One prominent analyst has projected Bitcoin could trade as high a $1.5 million by 2030. That’s another 15X increase.
Bitcoin is the king of the coins. At the other end are smaller ones with essentially zero market value, according to Coinbase.com. This I don’t understand. But again the question is, why do any digital coins, particularly the ones most highly valued, have any value at all?
To answer that, first think about money. Good old-fashioned dimes and dollar bills, and all the non-physical manifestations of money such as the electronic balance showing in your online bank account. Why does a dollar have value?
The U.S. dollar is a fiat currency. Fiat derives from the Latin, meaning “let it be done.” Fiat currency is declared by a government to have value. It is not necessarily backed by any physical asset. President Richard Nixon disconnected the dollar from the U.S. gold standard in 1971.
Suppose someone came along and designated a new currency. Suppose they said, bananas shall be the new currency. Or at least an alternative to the dollar. You’d buy a cup of coffee and the barista would say, that’ll be six bananas. Could someone do that?
Sure they could. The thing is, it would need to be widely adopted and accepted as currency. This is a major hurdle that’s been cleared, to a great extent, by some digital assets. You can now buy a car or make your mortgage payment with Bitcoin. I have heard of title companies accepting Bitcoin in real estate transactions.
But its value is too volatile for common everyday use. A car dealer may indeed accept payment of say, 0.38 Bitcoins. (Currently around $38,000.) They probably won’t hold that asset for any length of time. They’ll run to an online exchange such as Coinbase and trade their digital assets for dollars.
Someone’s willingness to accept Bitcoin is based confidence that they can in fact “cash it in” for dollars. The asset has value because enough people agree it has value.
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