The Fundamentals Of Bitcoin
Updated: May 3
Bitcoin is widely misrepresented, and in order to invest in something, we must first know exactly what it is. And Bitcoin itself, the OG crypto, actually resembles money instead of currency. Let me explain:
In an economy, people want to trade with each other. Either we can trade item-item, or we can use money or currency as a tool to show how valuable any given item is compared to all other items in the world. This allows us to use money and currency as a means of exchange. The key difference between money and currency is that currency can never be used as a store of value. This is because the value of any given currency only ever goes down. $1 million in 1950 has far more purchasing power than $1 million in 2021, because the value of the dollar has decreased over time, as all currencies do.
This is important because Bitcoin is a successful store of value using blockchain technology. Since Bitcoin can be used as a store of value, it is technically money, not currency.
Finally, the value of money is based on the size of the economy, or simply: the more people that use money, the more valuable money is. And the reason for this is because money is used in exchange, and if your money allows you to trade with only a few people, it doesn’t have much value. Whereas a type of money that is widely accepted and used by everyone in trade has lots of value because it is very useful. Therefore, the more people that accept Bitcoin as money, the more valuable Bitcoin becomes.
When it comes to investing, the fundamentals of value will always determine the best investments. Bitcoin’s value comes from its acceptance into the economy. As Bitcoin becomes a more acceptable means of exchange (and more businesses accept it as a form of payment), the more valuable it will become.
There are three ways that Bitcoin acts as money:
As a means of exchange
As a store of value
As a way to measure the value of other goods & services (a unit of account)
The price of bitcoin will rise as its value grows. And the best time to invest is when the price of Bitcoin falls below its theoretical value. This is because in the long run, the price of something will inevitably match its value. Yet in the short run investors can capitalize on mismatches between an asset’s price and its value.
Thus as Bitcoin becomes progressively sewn into the global economy, its price may not reflect its value in society. And when its price is below its inherent value, an investor will capitalize.