Key Points

• The value of Bitcoin does not have to rely on widespread retail payments.
• Scarcity and investment demand can drive its appreciation.
• Weak trading activity can lead to long-term security issues.

Bitcoin was launched in 2008 and was initially designed as a peer-to-peer electronic cash system aimed at allowing people to transfer funds without relying on banks. However, nearly two decades later, its investment appeal has increasingly revolved around another aspect: storing wealth, rather than spending it.

This raises an important question: even if consumers rarely use Bitcoin to purchase goods and services, is it still possible for its value to increase significantly?

The answer is yes, but its economic logic is much more complex than the fixed supply of Bitcoin itself.

Why can Bitcoin appreciate in value without being used for daily payments?

The market value of Bitcoin depends on how much buyers are willing to pay for its limited supply, rather than on the number of transactions that have been processed.

According to the protocol described in Satoshi Nakamoto's original white paper, new Bitcoins enter circulation through mining, and the issuance volume will decrease with scheduled halvings. The total supply cap is approximately 21 million BTC.

Imagine a hypothetical market where investors collectively wish to hold an additional 2 million BTC as long-term savings.

If current holders are unwilling to sell at the current price, buyers will have to raise their bids to attract available supply. Even if retail payment activities remain unchanged, the price of Bitcoin could still rise.

The reason why gold can attract considerable investment demand, without the need to frequently appear at the checkout counter, is similar in principle.

However, scarcity alone does not create value. Assets must also maintain sufficient demand, credibility, and liquidity for buyers to continue to assign them meaningful prices.

Will Bitcoin ETF replace payment methods and become a driving force for growth?

In January 2024, the launch of spot Bitcoin trading products on US exchanges created another channel for investment demand.

As confirmed by the U.S. Securities and Exchange Commission, these products allow investors to gain exposure to Bitcoin through traditional securities markets without the need to directly manage cryptocurrency wallets.

Therefore, institutional investors can allocate capital without using Bitcoin for daily transactions.

For example, assuming that ETF has a net inflow of 500 million US dollars and the price of Bitcoin is 100,000 US dollars, then this corresponds to a demand for 5,000 BTC. This is on the premise that all of this inflow of funds is used to purchase Bitcoin.

This exceeds the approximate new mining supply of 11 days, which is calculated based on a subsidy of 3.125 BTC blocks each.

However, the buying orders from ETF will not automatically translate into an equivalent increase in price, as existing holders can also supply more coins.

Will low usage rates of payments ultimately harm Bitcoin?

There is an important limitation regarding the logic of “value storage” here.

Bitcoin miners' current income comes from the newly issued BTC and transaction fees. As block subsidies continue to decrease in the future due to halvings, the importance of transaction fees for network security may become even greater.

If transaction demand remains weak, miners may eventually find it difficult to sustain their operational costs without a sufficiently high price for Bitcoin or higher transaction fees.

This creates a potential tension between the long-term investment value of Bitcoin and the economic mechanisms that support the operation of its blockchain.

Therefore, the relationship between the reduction of halving rewards and the profitability of mining is important, even for those investors who never intend to spend Bitcoin.

At the same time, payment technologies such as Lightning Network can support daily transactions without the need for each payment to be settled individually on the Bitcoin mainchain.

Adrian Cole

Adrian Cole has been engaged in financial market reporting for over 6 years, with a focus on cryptocurrencies, stocks, and macroeconomic trends. He tracks Bitcoin, major altcoins, the U.S. stock market, interest rates, commodities, as well as data points that drive market changes. Over the years, he has written hundreds of market updates and analysis articles, with an emphasis on price trends, investor sentiment, and the connections between traditional finance and digital assets.