The Value of Bitcoin

The Value of Bitcoin

Many people try to determine Bitcoin’s value by treating it like other transactional currencies. But in actuality, Bitcoin has a lot more to offer. In addition to its applications as a currency, Bitcoin can:

  • Be used as a store of value or financial safe haven. This means that it’s a safe place to hold your money. If you hold your private keys, no one can touch your funds, period.
  • Handle international remittances. Bitcoin can be instantly transferred internationally with low fees and no financial intermediaries..
  • Bring financial services to billions of unbanked people who don’t have access to or can’t afford traditional banks.
  • Deploy smart contracts, or programmable actions scheduled to be performed when certain criteria are met.
  • Provide Proof of Existence, a concept that will revolutionize legal and financial frameworks.

All of this comes together to form Bitcoin’s value proposition, or the combined factors that make Bitcoin worth something.

While it differs from regular money in the ways listed above, Bitcoin maintains all of the characteristics of money: durability, portability, divisibility, fungibility, and scarcity. Bitcoin combines the security of gold with the convenience of fiat money – while introducing other disruptive capabilities to improve the stagnant FinTech industry.

 

Bitcoin as a Financial Safe Haven

Offshore bank accounts

The super-rich hold as much as $32 trillion in offshore tax havens. This excludes non-financial resources such as real estate and gold. If Bitcoin were to capture even 1% of that sum, the market cap of Bitcoin would be $320 Billion, or about $20,000 per BTC (assuming the current supply of 16,573,750 BTC in September 2017). This doesn’t factor in Bitcoin’s value derived from the other factors mentioned here or the effect of that money actually flowing into the market on Bitcoin’s price. Some analysts have gone as far as to say that Bitcoin could be worth upwards of $1 Million a coin based on offshore accounts alone.

Is it far-fetched to think that billionaires would consider storing a small fraction of their wealth in BTC? Not at all. In fact, we have evidence that Bitcoin is already a store of value for the world’s elite. The country of Cyprus, a tax-friendly banking haven for European and Russian elites, restricted access to cash stored in their banks during a financial collapse in March 2013. During this time, Bitcoin prices skyrocketed 87% to $88, up from $47.

Bitcoin offers the privacy of an offshore bank, without the geopolitical risk. Bitcoin has no storage fees, and access to funds cannot be restricted if you hold your own private keys

This doesn’t mean you’ll get to avoid taxes if Bitcoin appreciates in value. The IRS and other organizations around the world are still defining the rules around virtual currencies, but in the U.S. Bitcoin is considered a capital asset, meaning that you’ll have to record your tax basis and report income on gains.

Gold

The total value of the world’s gold supply is estimated at $8.5 trillion (at $1,600/troy ounce), with about $2.5 trillion of that total used in financial instruments (ETF’s, etc). Like gold, Bitcoin is rare. In fact, the rate at which Bitcoin is mined is modeled off of the rate in which commodities like gold are mined. Unlike gold, Bitcoin can be transmitted over a communications channel. Gold needs to be melted down and assayed to verify its purity, this is not a problem with Bitcoin.

With Bitcoin, there is no question as to whether or not you own the balance in your wallet. Only your private keys can be used to spend your Bitcoin. The same cannot be said for gold, where as many as 500 people can all stake a claim for the same ounce of gold.

Bitcoin as a Currency

According to the CIA factbook, the total value of the world’s money is $80.9 trillion. This includes coins, banknotes, money market accounts, as well as saving, checking and time deposits. Bitcoin is seeing increased use as a currency, as it is perfectly suited for bank transfers, commercial payments, P2P payments, and remittances.

Bitcoin to Facilitate Bank Transfers

Bank transfers take forever. Even Automated Clearing House (ACH) transfers in the United States can take 5+ days to clear. And international SWIFT transfers are even worse! These transfers rely on banks to communicate on outdated networks. To make a transfer happen, banks must find intermediary companies that specialize in transfers to carry out and keep accurate records of the transaction. This is a time consuming, costly process.

Bitcoin is perfectly suited to facilitate the transfer of money. Bitcoin transactions are instant, with tiny fees, and there’s no need for costly financial intermediaries! Many banks are attempting to implement their own blockchain technology to compete with Bitcoin, while others are looking to use Bitcoin as the transfer medium.

The bank transfer market is huge, just look:

Fedwire: 500,000+ transactions, $2.1 trillion per day
CHIPS: 280,000+ transaction, $1.4 trillion per day
SWIFT: 10 million+ messages, $5 trillion per day

Banks are scrambling to improve their transfer infrastructure. Users are demanding faster, cheaper payments with less paperwork and more transparency. Bitcoin may see huge growth in the banking sector as it becomes adopted across the world.

Bitcoin as a Commercial Payment

More and more retailers are starting to accept Bitcoin as a way of payment.

Major companies and small businesses are viewing Bitcoin as an attractive option due to:

  • It’s potential for extremely low fees. Most traditional credit card companies charge a percentage of the overall value of the transaction as well as a fixed fee per swipe, which can make micro-transactions very expensive for vendors.
  • Irreversible transactions. Because Bitcoin transactions cannot be reversed, sellers are protected from chargebacks. (Escrow services can be put in place to also protect the buyer).
  • The emergence of companies like BitPay that simplify the transaction process.

In 2017, Bitcoin introduced a new feature called Segregated Witness (SegWit). SegWit has helped Bitcoin increase its number of transactions per second, and when combined with the Lightning Network in late 2017, Bitcoin will be able to handle more transactions per second than Visa.

We’re still a ways off from seeing Bitcoin used day-to-day for purchases, but acceptance is growing, and Bitcoin is going after a huge market. The Federal Reserve estimates there are a total of $24 billion in credit card payments per year for the U.S. alone, and that number is only rising.

 

As of September 2017, here are the major credit card companies and associated market caps:

Visa: $240 Billion
Mastercard: $150 Billion
American Express: $77 Billion
Discover: $22 Billion

Many countries around the world are still cash-based. Many citizens of third world countries never hand landline phone service but currently have cell phones. Many expect these same people to skip over traditional bank accounts and start using Bitcoin on their smartphones. Bitcoin has many similarities to cash, and does not require the user to have a bank account, a major hurdle that prevented the same users from ever getting credit cards.

Bitcoin for Person-to-Person (P2P) Transactions

Bitcoin is a borderless payment solution. Regardless of location, citizenship or age, Bitcoin can be instantly transferred with unbreakable security for minuscule fees, typically less than a dollar for large transfers. Third party companies like Paypal, with a market cap of $75 Billion, can freeze a company’s account when they decide to change required reserves. That means if your company starts making a lot of money, Paypal can change how much money you’re required to hold with their company, and how much you’re allowed to cash out. Bitcoin funds cannot be frozen, and there is no central entity that can govern your money.

Bitcoin for International Remittances

Global remittances totaled $582 billion in 2015. Remittances are payments across international borders – think migrant workers sending money back to their families. Wire companies like Western Union charge fees of up to 10% of the total. Wire transfers can take up to 5 days depending on the location of funds.. Below are two large remittance companies and their associated market caps:

Western Union: $8.84 Billion
MoneyGram: $850 Million

Users can take the power in their own hands by transferring BTC across borders for a fraction of what Western Union charges. If you don’t want to use Bitcoin, no problem – companies like Abra help people send their cash home while using Bitcoin as the medium behind the funds transfer. The user never sees the Bitcoin and likely doesn’t realize Bitcoin is being used in the transfer, but their fees are much lower!

Bitcoin for the Unbanked

There are billions of people in the world without access to banking. Over 50% of Mexican citizens don’t have bank accounts. In many African Countries, the monthly fee for a bank account is higher than the cost of a monthly cell phone bill. Many small businesses cannot get loans because there are simply no local banks to grant them. Without credit cards, there is no way for certain people to buy goods online, even though they have the internet in their pocket! Amazingly, that same mobile internet allows the unbanked to use Bitcoin, and to store it with no fees.

The internet has led to many digital services being rendered without the buyer and seller ever having to meet. However, paying for services across borders is still a problem. Many programmers in India get paid in Amazon Gift Cards since they often do not have access to traditional banking. Minors cannot sign up for credit card merchant account or even bank accounts in many countries. Bitcoin allows these service providers to get paid.

Bitcoin for Smart Contracts

Bitcoin and blockchain technology provide the basis not only for transfer of value, but a potentially limitless number of other uses. Specific actions, or smart contracts, can be programmed on the blockchain to perform certain steps when defined conditions are met. Here’s an example: You’ve got an air-bnb rental property and want to provide a laundry machine for your guests to use. You want to charge extra for this service, but you don’t want to buy a bulky and expensive industrial coin-operated machine. No problem, simply use a smart electrical socket and program it to run only if a certain amount of BTC is sent to your address. Sounds insane? This is an actual use case implemented by Slock.it, a company that uses Blockchain technology and the Internet of Things to solve all sorts of problems. An even simpler use for this technology is to program a smart contract to release money on a certain date. While this seems trivial, it has huge implications.  Smart contracts can meet users needs for escrow, execution of wills, payroll, and much more!

Bitcoin as a Public, Trustless, Distributed Server

All Bitcoin transactions are public; anyone can look up a transaction on a blockchain explorer and confirm the sender and recipient. All Bitcoin transactions are time stamped, proving the exact moment the transaction took place. All Bitcoin transactions are secure. Bitcoin can only be transferred by the owner of the applicable private key, which cannot be faked. Bitcoin transactions are immutable. Within minutes, the world’s largest consensus mechanism (Bitcoin nodes) confirms the state of the network, and the world’s largest source of computing power (Bitcoin miners) cements the history of the blockchain. There is no other network in the world with these features, at this scale. In contrast, bank transactions are hidden from public view, corporate servers are centralized, and competing digital currencies have a tiny fraction of the security (hashpower) of the Bitcoin network.

These fundamental principles of Bitcoin can be used to build some incredible applications. Bitcoin can be used to build proof of existence applications for sealed bids, proof of ownership (titles), notary services, and even news content. These applications can be built to operate faster and cheaper than existing solutions in a truly trustless way.

Conclusion

Bitcoin’s potential is immense. The Bitcoin protocol is a revolution in computer science, distributed systems, economics and finance. As more people learn about the benefits of Bitcoin, it will continue to see adoption in man different sectors.

Bitcoin is a fascinating technology. It’s easy to get overwhelmed. Contact us to schedule a one-on-one or group consultation.

Be sure to check out our Blog to stay up to date with Bitcoin developments. Or, learn a bit about altcoins!

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