The high value of Bitcoin is not 'just a bubble', it's the reflection of how the market values the new efficiencies held by the technology of crypto currency.
To best demonstrate what new efficiencies Bitcoin brings to business I will compare BTC to the ancient currency gold and to government backed fiat currencies most of us still use Today.
Gold has tangible value because it can be used to create jewelry, art and it has some limited use in electronics and some other industries. But, gold is seriously overvalued if we look at its actual rational value that is based on how much well-being it can bring to humans. Gold's value mostly hangs on a historical and cultural perception that it's valuable because it always has been valuable. As a resource there are many metals that are much more useful than gold.
Gold is not practical for everyday monetary transactions. It's hard to verify if a gold bar or coin is real. It's hard to transport it because it's heavy and you need somebody trustworthy to carry it for you or you have to spend your time to do it yourself. If you want to trade it virtually you need a trustworthy third party to stand between the seller and buyer. Keeping gold safe is relatively hard and expensive.
It's no wonder only a small percentage of people use gold Today for financial transactions.
Government fiat money is backed by states, which effectively means that a group of people under an umbrella of a common value system (a country) agrees to use an arbitrary piece of paper and its digital representation as a unit of exchange. As of 2013 no country uses a gold standard as the basis of its monetary system, although some still hold substantial gold reserves.
Fiat currencies are easier to verify than gold because of the security features of paper money and the banking system. But government backed fiat currencies are much less safer than most people realize. It's estimated that as high as 1-3% of all cash in circulation is counterfeit and hundreds of millions of dollars are lost from banks every year due to online thefts that are kept under the blanket to avoid erosion of trust.
It's easier to transact with fiat money because it's lighter than gold. Wire transfer and checks are pretty safe to send, but you still need a third party and the fees are high. For an international wire transfer of $500 you may easily pay $30-40 (6-8%) depending on the country or bank. And the wire transfer takes at least a day or two and it is only executed during regular business hours. You can use debit and credit cards for spending your money, but it is limited in amount and it also includes relatively high 2-5% charges usually hidden in the price of the product you're purchasing.
Keeping your dollars or Euros secure on a bank account is somewhat safer and much easier than keeping gold in a private or bank safe especially since the introduction of online banking.
The benefits introduced by fiat generated great efficiencies which were passed on to people using it and thus it was adopted globally.
Crypto currencies are not backed by any precious metal or government. Bitcoin is backed by the millions of users who collectively agreed to accept the mathematical algorithms powering BTC as an instrument for financial transactions in a similar fashion as the citizens of a country agree to use a government fiat currency for the same purpose. Currently the millions of users of Bitcoin can be compared to the size of a smaller European nation like Austria.
Crypto currencies can be easily verified by the blockchain with software that works automatically for the user.
It's nearly impossible to counterfeit Bitcoins.
It's easy to send Bitcoins because the data travels through the internet instantly any time of day and to trade you don't need a third party. You can exchange Bitcoins between buyer and seller directly and safely without any third party.
Transaction costs are mostly free. In some cases you need to pay an extremely small fee if the file size is too big compared to the amount sent.
Keeping Bitcoins safe is relatively easy and there are many ways to do it depending on personal preference and risk tolerance. A thumb drive can theoretically hold a billion dollars. It is important to mention however that the content of online wallets are stolen occasionally from online exchanges. If one wants to play it very safe he can store his Bitcoins in a cold storage locally protected by a strong password.
|Feature||Gold Coins||Government Fiat||Crypto Currency|
|Verification of authenticity||Hard||Somewhat easy||Very Easy|
|Ease of transactions||Hard||Easy||Very Easy|
|Safekeeping||Hard||Somewhat easy||Somewhat easy|
The value derived from the elimination of the few percents on transaction and bank fees, and the time saved because of the faster transactions that can be initiated 24/7/365 is substantial. Most businesses work with a small margin of profit. The gains that can be realized just by implementing crypto currencies can increase their profits by as high as 10-50% depending on the field. The savings will eventually be passed on to consumers who will have an increased purchase power of at least 5-15% percent compared to using any of the currently popular financial systems.
It's important to note that the adoption of crypto currencies will be most transformative in poor communities where every cent matters in a similar way to how the mobile payment system M-Pesa changed the lives of millions of Africans to the better.