Bitcoin is an asset that does not generate any income, so many conclude that the increase in price is due solely to speculation.

But that’s an incomplete picture. The rising price of BTC is driven by both speculation and a dividend for Bitcoin owners.

How?

If you look at an asset like gold, it has value for two reasons:

1: industrial and decorative usage

2: as a store of value

Both factors determine the price of gold. When industrial demand goes up, so does the gold price.

It’s easy to forget that Bitcoin is not just a currency, or “digital gold.” It is also a payment network. Bitcoin has value for two reasons:

1: as a payment network

2: as a store of value

The usefulness of Bitcoin as a payment network is what made it popular in the first place. If you want to buy an anonymous VPN, email, or web hosting service, vitamin A skin cream from an Indian pharmacy, or support a news organization unpopular with the U.S. government (Wikileaks), Bitcoin is the only way to go.

For these uses, Bitcoin provides not only a unit of account but a global payment network with final settlement. Even though the merchants will probably immediately convert their Bitcoin to fiat, these transactions provide an ongoing demand for Bitcoin.

The demand for “transactional Bitcoin” supports the use of Bitcoin as a store of value, since Bitcoin HOLDers expect future usage to support the purchasing power of their BTC savings.

In modern times, gold is a decent store of value, but a poor payment mechanism, since many transactions are virtual and no one wants to carry bags of gold. Fiat money is a poor store of value (because of inflation) and as a payment network, it is only marginally better than gold, since currency can’t be sent virtually.

The vast majority of fiat-denominated transactions are settled digitally, and a vast infrastructure of banks, credit associations, and clearing and settlement providers are needed for the fiat-denominated payment network to function.

Because Bitcoin is a payment network that provides secure final settlement, it is able to make much of the financial sector of the economy redundant, and thus capture that economic value in the currency itself.

All of this is to say that the value of Bitcoin is backed not primarily by its rarity or speculation, but by its utility as a payment network. After all, there are many other rare assets in the world, but none of them come with a censorship-resistant payment network build it.

While the supply of Bitcoin is slowly increasing, transactional demand is growing much faster, and so is the amount of Bitcoin that is permanently lost every year (estimated at over 20%). This makes Bitcoin effectively a deflationary money. Over the long term, the return to speculators will vanish, and the market cap of Bitcoin will stabilize. It will be composed of the combined demand for Bitcoin as a store of value plus the quantity needed for its use as a medium of exchange.