Real value in a digital world: Why Bitcoin is set up for the long term

The concept of investing in cryptocurrency can be difficult to grapple with for more traditional investors. People often criticize their lack of intrinsic value, the fact that they are intangible, and their speculative prices.

But instead of trying to value cryptocurrencies like we do stocks, it can help to think of them more like commodities. Physical goods such as gold, oil and timber are priced in relation to supply and demand. As we begin to approach the valuation of cryptocurrencies from this point of view, there is one in particular that meets many of the criteria of a traditional commodity: Bitcoin (BTC -1.03%).

Considering Bitcoin as a commodity may be a new concept. How can it be a commodity if it is not representative of a tangible asset and provides no real use cases? But when we take a look under the hood, it becomes clear that Bitcoin’s price may actually be representative of more than mere speculation.

The only Bitcoin metric that matters

Before we get into supply and demand, we need to analyze why there is demand for Bitcoin at all. Most proponents argue that Bitcoin’s primary use case is derived from its scarcity, which ensures that there will only ever be 21 million Bitcoins in circulation. While this is a crucial aspect of Bitcoin’s utility, there is another layer to its intrinsic value.

Meet the hash rate, which measures the computational power of a blockchain. Higher hash rates lead to an increase in mining difficulty. The greater the mining difficulty, the greater the level of security and decentralization. Those are the two characteristics that distinguish Bitcoin from any other blockchain.

Evaluating a blockchain’s overall hash rate helps measure the decentralization and security of a network. As a blockchain becomes more decentralized and secure, it ensures that decision-making and control are not in the hands of select groups or individuals.

Bitcoin’s hash rate is the highest among all other blockchains, and has been continuously rising since its creation as more miners and more powerful computers joined the network. It recently hit the record on January 25.

From this angle, it becomes more apparent that there is actually something tangible about Bitcoin’s price. In this sense, Bitcoin’s hash rate acts as a gauge to measure its ability to store value in a decentralized and secure manner.

Scarce supply meets massive demand

To truly measure Bitcoin as a commodity, there must also be quantifiable demand for a limited supply. As previously mentioned, Bitcoin’s code is hardwired to ensure that there will only ever be 21 million Bitcoins in circulation. Today, there are about 19.25 million in circulation, and the remaining 1.75 million will enter the pool at a decreasing rate until the last Bitcoin is mined in 2140.

Fortunately, it is also easy to capture the demand. Because blockchains are open source and transparent, blockchain data is public, so we can measure demand in a number of ways.

One of the easiest and most meaningful ways to do this is to evaluate the number of unique addresses on the blockchain. Although a person can theoretically have multiple addresses, the number of addresses can still serve as a proxy for the demand and use of a network.

Like the hash rate, the number of Bitcoin addresses has steadily increased since the cryptocurrency was created 14 years ago. In fact, this number has been more than just stable – the rate at which new addresses have joined the network has increased massively.

In October 2015, there were only 100 million addresses on the Bitcoin blockchain. In July 2019, this figure reached 500 million. Today, it has blossomed to more than an astounding 1 billion addresses. This represents a compound annual growth rate (CAGR) of 342%.

The long-term case for Bitcoin

This combination of limited supply, increased demand, and measurable ease of use makes Bitcoin unlike any other cryptocurrency in existence. While new cryptocurrencies are seemingly created every day, none are able to offer investors a combination of true decentralization, peak security, near-exponential demand, and a limited supply.

The price of Bitcoin is rooted in more than just speculation. We must recognize that the price is actually a representation of the demand to store value on the world’s most powerful, decentralized and secure network.

While it may be difficult to grapple with the fact that you can’t hold a Bitcoin in your hand, intrinsic value is indeed present – it may just require a shift in perception. As this concept becomes more widely accepted over the coming years and decades, it is likely that Bitcoin’s price will be subject to the dynamics of supply and demand just like any other commodity.