Summary:
Bitcoin's value is fueled by increased network participation and security.
Bitcoin serves as a store of value, medium of exchange, and a unit of account.
Salability across time, space, and scale are crucial traits of sound money.
The proof-of-work mechanism enhances security through distributed mining.
Valuing Bitcoin can be approached using Metcalfe's Law, estimating a network value of around $380 million.
Cryptocurrency remains one of the most controversial topics in finance, and Bitcoin (BTC) stands at the forefront. This digital currency has attracted both fervent supporters and staunch critics, with opinions ranging from its potential worth of $0 to limitless valuations. In this article, I share my transformation from skeptic to believer, illustrating why Bitcoin should be part of your investment portfolio.
Bitcoin as a Currency
The narrative surrounding Bitcoin seems almost fictional. Emerging during the global financial crisis, Bitcoin's open-source software has allowed it to appreciate more than any other asset in history. While proponents argue that Bitcoin serves as immutable digital gold, critics label it a Ponzi scheme and a tool for financial crime.
Until this year, I was among the doubters, trading Bitcoin without ever truly understanding its technology. However, as I researched more, I found that Bitcoin functions as a store of value, a medium of exchange, and a unit of account. It can be easily used for transactions, where values can be expressed in Satoshis (Sats), Bitcoin's smallest unit.
Salability of Bitcoin
According to Saifedean Ammous's book, The Bitcoin Standard, sound money must have three key traits: salability across time, space, and scale.
- Salability across space: Bitcoin can be accessed globally with just a seed phrase and an internet connection, unlike physical assets like gold.
- Salability across scale: Bitcoin's divisibility allows transactions of various magnitudes, accommodating different values.
- Salability across time: Unlike fiat currencies like the USD, which lose value over time due to inflation, Bitcoin's fixed supply of 21 million ensures its value is preserved.
Understanding Blockchain Technology
Blockchain technology underpins Bitcoin's security and functionality. With a supply cap of 21 million bitcoins, mining new coins requires substantial computing power and energy. This proof-of-work system enhances network security but also necessitates a widely distributed hash rate to mitigate risks of centralization.
Valuing Bitcoin: A Complex Challenge
Valuing Bitcoin is inherently challenging. Unlike fiat currencies, which have established networks, Bitcoin's value is derived from its network participants. Applying Metcalfe's Law, we can estimate Bitcoin's value based on the square of its active nodes. As of now, there are about 19,516 active Bitcoin nodes, suggesting a network value of approximately $380 million. Similarly, with around 3 million mining rigs, the value of the Bitcoin network continues to rise.
Investor Takeaway
Discussing Bitcoin's value can be intricate, but it is essential for understanding its role as a store of value. I maintain that Bitcoin is a Buy at almost any time, particularly for long-term investors. The network has successfully scaled from a few participants to many, and I believe the future holds even more promise for Bitcoin's value growth.
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