When you come across a piece of gold and an empty packet of chips, you know that gold is valuable because we have a certain understanding of “value” in our mind. Anything that serves a purpose and is desirable by people, is valuable. Indian Rupee is valuable because it lets us transact.

The evolution to Bitcoin:

The idea of “value” came into existence with the introduction of barter system. People had to exchange one good for another; and if Good A is more valuable (more in demand) than Good B, more of Good B had to be exchanged for Good A. Due to the complexities of the barter system, the civilisation progressed to the idea of money: Exchange of goods in terms of one common good (i.e. currency).

But with increased and faster movement of money, the world has progressed further to digital transactions. All the currency notes don’t change hands in real, we have mere digital representations of the transactions.

And now comes, cryptocurrency, the most popular one being the Bitcoin. Bitcoin has value because:

  1. no duplication is possible due to blockchain technology behind it,
  2. it eliminates the middle man (i.e. banks) entirely,
  3. it is transnational, can seamlessly transact across nations through it,
  4. it is decentralised, no central bank or government controls it and hence lower fee and
  5. it works like an e-wallet

How did Bitcoin get its numerical value?

In today’s internet savvy gen, Bitcoin brings an entire new concept of money, which is safer, faster and more efficient to keep pace with today’s business and lifestyle. The above points only prove that Bitcoin has intrinsic value. But how did Bitcoin get its numerical value? How is 1 Bitcoin = 10 lakh rupees today?

Let’s understand something called Network Effect. The Bitcoin has an element of social networking attached to it which means that the more number of people use it, the more value it has. Email is one of the most important ways of communication, why? Because everybody has an email id. What fun will one single user have on Facebook, unless there are thousands of people who find it useful and use it.

Of course, when a new thing comes up, people are skeptical about it. But few of us, who have the risk taking ability, go out and try it.

In case of Bitcoin, it led to massive profits for the early investors and hence, more and more number of people got connected to it. Since Bitcoin’s price is controlled by the forces of demand and supply, even one new entrant could create huge price fluctuations in the beginning. When Bitcoin was introduced, it was said by the founders that only 21 million Bitcoins can be mined over a period of 100 years. Hence, since the supply is limited and the demand is growing regularly, there is an upward trend in the Bitcoin price inspite of the drastic fluctuations.

Conclusion:

Without the Network Effects, the technology is nothing. If the Network Effect continues, Bitcoin may keep solving the problems. But if it doesn’t, cryptocurrencies will be soon  forgotten.

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You can read about the taxation of profit on Bitcoin here.
Author:
Akanksha Goel | LinkedIn