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I believe many people around you may have such doubts: Why is something that seems so insubstantial worth so much? When will this bubble burst?
After years of deliberate smear campaigns by domestic media, what impressed me the most was last October when BTC reached a new high of $100,000. Domestic media deliberately only reported on how much the crypto market's short positions had liquidated, making it seem like a black swan event had occurred.
Before formally revealing why cryptocurrencies are worth their weight in gold, let's review the historical changes in BTC's value.
1️⃣ Startup phase (2009-2010): Bitcoin was born in 2009, initially valued at almost nothing. In May 2010, 10,000 Bitcoins were exchanged for two pizzas, equivalent to a market price of $25, setting Bitcoin's initial value at $0.0025. In November 2010, the price of one Bitcoin broke $0.5 on Mt. Gox, the world's largest Bitcoin exchange, rising approximately 167 times from its initial price.
2️⃣ The first bull market (2011): In February 2011, Bitcoin's price was equivalent to the dollar, then reached $31.9 in June, an increase of approximately 16,000 times from its initial price. Bitcoin trading platforms for GBP, BRL, and PLN were launched, mainstream media coverage increased, and investors flocked in. In June of the same year, the Mt. Gox exchange experienced a 'hacking incident,' causing Bitcoin prices to plummet.
3️⃣ The second bull market and the bubble burst (2013): In early 2013, the price of Bitcoin surpassed $100, soaring to $1,163 in November, exceeding the international price of gold. Subsequently, the bubble burst and the price plummeted to about $50.
4️⃣ The third bull market (2017): Bitcoin's price skyrocketed in 2017, rising from $789 at the beginning of the year to $19,660 in December, with an annual increase of 1,700%. It then entered a bear market, with Bitcoin's price continuously falling in 2018, reaching a low of about $3,200 by the end of the year, a decline of about 85%.
5️⃣ Stable fluctuation period (2019-2020): Bitcoin's price gradually rebounded amidst volatility, breaking the historical high again by the end of 2020, reaching approximately $29,000.
6️⃣ New highs and adjustments (2021): In April 2021, Bitcoin reached an all-time high of $64,895, and in November the price peaked again at $69,000 before falling due to inflation concerns.
7️⃣ Volatility and recovery (2023 to present): In 2023, Bitcoin rebounded from $16,530 at the beginning of the year to $42,258 by the end. In March 2024, Bitcoin surpassed $70,000, stabilizing around $63,821 after the halving event in April. After Trump's re-election in November, Bitcoin reached $80,000 and quickly broke $91,000. On December 5, Bitcoin's price exceeded $100,000. In May of this year, Bitcoin's price continued to rise, breaking the $100,000 mark multiple times, peaking at $102,938.56, setting a new high for the year.
📍It is evident that Bitcoin's price fluctuations are enormous, with ups and downs, but its value has consistently shown an upward trend. Below, we will divide the logic behind its value increase into six parts.
1) Scarcity and supply-demand relationship
2) Production costs and 'floor value'
3) Rigid market demand for decentralization and privacy
4) Social recognition and network effects
5) Macroeconomic background and hedging demand
6) The essence of a commodity rather than currency
1) Scarcity and supply-demand relationship 🔻
Bitcoin's scarcity is one of the core driving forces of its value. The total supply of Bitcoin is fixed at 21 million coins, and due to reasons such as lost private keys, the actual circulating supply may be even less. Its issuance speed gradually slows through a 'four-year halving' mechanism, a design similar to gold's limited reserves, hence it is dubbed 'digital gold.' Economic principles of supply and demand indicate that when supply is limited and demand increases, prices naturally rise.
Scarcity is not only reflected in technical design but also resonates psychologically with investors and users. Humanity's pursuit of rare resources (like gold and diamonds) is continued with Bitcoin. The 'scarcity narrative' of Bitcoin is widely disseminated in the market, attracting a large number of speculators and long-term holders, further boosting demand.
In comparison to other assets: Unlike traditional commodities (such as oil and grain), Bitcoin's scarcity is artificially designed and cannot be increased through technical means. This 'absolute scarcity' is unique in the digital world, distinguishing it from other infinitely replicable digital assets.
Each halving event (such as in April 2024) reduces the output of new Bitcoins. Historically, halvings have often been accompanied by price increases (as in 2012, 2016, and 2020). This is not only due to the reduction in supply but also because halving events attract media and investor attention, creating market enthusiasm.
2) Production costs and 'floor value' 🔻
The mining process of Bitcoin requires a vast amount of electricity and computing resources, with global mining electricity costs approximately $20 billion since 2009. This high production cost provides Bitcoin with a 'floor value'—that is, the price is unlikely to stay long below the mining cost; otherwise, miners will cease operations, leading to network paralysis.
Energy value anchoring: Bitcoin's mining mechanism converts real-world energy consumption into the value of digital assets. This 'energy anchoring' distinguishes it from other virtual assets. Mining costs (electricity, hardware depreciation, etc.) provide a certain bottom line for Bitcoin's price, similar to the cost support of gold mining.
Dynamic adjustment mechanism: The Bitcoin network ensures stable block generation time (about 10 minutes) through a difficulty adjustment mechanism, regardless of changes in computing power. When prices rise, more miners join, increasing difficulty and costs; when prices fall, some miners exit, decreasing difficulty and costs. This dynamic balance further solidifies Bitcoin's 'cost value.'
Although high energy consumption has sparked environmental controversies, from another perspective, energy consumption itself is a testament to Bitcoin's value. The electricity consumed is a resource from the real world, endowing Bitcoin with the characteristic of being 'non-falsifiable,' enhancing market trust in its value.
3) Rigid market demand for decentralization and privacy 🔻
Bitcoin's decentralized nature makes it a form of 'digital cash' that does not rely on any central authority, fulfilling specific transactional needs. It is mentioned that Bitcoin's anonymity makes it an ideal medium for cross-border payments, asset transfers, and even illegal transactions in certain scenarios. This 'decentralized necessity' constitutes another important source of Bitcoin's value.
Pursuit of financial sovereignty: Globally, many view Bitcoin as an alternative to the traditional financial system. Whether in countries with high inflation (like Venezuela and Zimbabwe) or among individuals who distrust the banking system, Bitcoin provides a means of asset storage and transfer that bypasses governments and financial institutions. This idea of 'financial freedom' has attracted a large number of users, especially among the younger generation and libertarians.
Privacy and anonymity: Although Bitcoin's transaction records are public and transparent, users can achieve higher privacy through mixing services or privacy protocols. For individuals or organizations that need to protect asset privacy, Bitcoin is one of the few viable tools.
Low-cost advantage of cross-border transactions: Traditional cross-border remittances (such as through the SWIFT system) are often expensive and time-consuming, while Bitcoin transactions can be completed within minutes at relatively low costs. This provides practical value for global freelancers, small businesses, and immigrant communities, further expanding Bitcoin's use cases.
4) Social recognition and network effects 🔻
The value of Bitcoin comes not only from its technical characteristics but also from its strong social recognition and network effects. As the first cryptocurrency, Bitcoin has accumulated extensive community support, developer ecosystems, and market recognition over the past decade. This 'first-mover advantage' has made it the 'gold standard' in the cryptocurrency space.
Amplification of network effects: The value of Bitcoin increases with the participation of users, miners, developers, exchanges, and institutions. Similar to telephone networks or social media, the more participants there are, the higher the network value (Metcalfe's Law). Currently, Bitcoin is accepted by institutions such as PayPal and MicroStrategy, and several countries (such as El Salvador) regard it as legal tender, further solidifying its status.
Formation of a cultural symbol: Bitcoin has transcended its technical aspect to become a cultural symbol representing rebellion against traditional finance, pursuit of freedom, and decentralization. This cultural identity has attracted many non-technical users, driving market demand growth.
Speculation and FOMO: The dramatic fluctuations in Bitcoin's price have attracted a large number of speculators, whose participation further amplifies market enthusiasm. Each bull market (such as in 2017, 2021, and 2024) triggers FOMO sentiments, driving new funds into the market and thus pushing prices higher.
5) Macroeconomic background and hedging demand 🔻
The value of Bitcoin is also closely related to the macroeconomic environment in which it was born and developed. The 2008 financial crisis exposed the vulnerabilities of the traditional financial system, prompting Satoshi Nakamoto to create Bitcoin. In recent years, global monetary overexpansion, negative interest rate policies, and geopolitical uncertainties have further enhanced Bitcoin's appeal.
Potential to hedge against inflation: Against the backdrop of continuous money printing by major global economies (like the USA and EU), the purchasing power of fiat currencies is declining. Bitcoin's fixed supply makes it regarded as an 'anti-inflation asset,' similar to gold. The bull market of 2020-2021 was highly correlated with the quantitative easing policies during the pandemic.
Institutional investment drive: In recent years, institutional investors (such as MicroStrategy, Tesla, and Grayscale) have incorporated Bitcoin into their asset allocations, viewing it as 'digital gold' or a diversification investment tool. Following Trump's re-election in 2024, market expectations of relaxed cryptocurrency regulation further boosted Bitcoin's price.
Geopolitical hedging: In an international environment where sanctions are frequent (such as with Russia and Iran), Bitcoin has become a tool to bypass financial blockades. Geopolitical conflicts have intensified the demand for Bitcoin as a 'borderless asset.'
6) The essence of a commodity rather than currency 🔻
Do not think that just because Bitcoin has the word 'coin' in it, it resembles currency; in fact, I tell you, Bitcoin is not currency; it is a commodity.
Currency needs to have wide acceptance, value stability, and ease of transaction, while Bitcoin currently resembles more of a speculative asset or a value storage tool.
For example, why is Apple Inc.'s stock valuable?
Because everyone believes in the profitability of Apple Inc., right? Because it’s a business, it operates, it makes profits, it earns money, so everyone thinks it has prospects, so when it issues stocks, everyone buys them.
So what is this stock, really? It’s no different in essence from Bitcoin; it’s just a series of virtual numbers telling you that today this Apple company is valued at $32 trillion. Do you know Bitcoin's current market value? Bitcoin's current market value is about $2.04 trillion, surpassing Amazon, and ranking fifth among global mainstream assets.
📍Conclusion:
Overall, the value of Bitcoin as a cryptocurrency stems from the combined effects of scarcity, production costs, decentralization characteristics, social recognition, and macroeconomic background. Its 'commodity' nature makes it more similar to gold rather than traditional currency.
The attributes of digitization, decentralization, and globalization give Bitcoin a unique value proposition. Where there is demand, there will be a market; this world operates on such principles, which also indicates that Bitcoin is a significant necessity. It allows transactions that transcend borders and time, representing one of the few trading methods available.