Does bitcoin have value

What Determines the Price of 1 Bitcoin?

What Determines Bitcoin’s Price?

Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator (or creators) of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and is used to prove ownership.

Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different than purchasing a stock or bond because bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form 10-Ks to review.

Understanding What Determines Bitcoin’s Price

Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to bitcoin. Contrarily, bitcoin prices are influenced by the following factors:

• The supply of bitcoin and the market’s demand for it
• The cost of producing a bitcoin through the mining process
• The rewards issued to bitcoin miners for verifying transactions to the blockchain
• The number of competing cryptocurrencies
• The exchanges it trades on
• Regulations governing its sale
• Its internal governance

Key Takeaways

• Purchasing stocks grants you ownership in a company, whereas purchasing bitcoin grants you ownership of that cryptocurrency.
• Bitcoin is neither issued nor regulated by a central government and therefore is not subject to governmental monetary policies.
• Bitcoin prices are primarily affected by its supply, the market’s demand for it, availability, and competing cryptocurrencies.
• As of December 2020, approximately 88.5% of the total bitcoin supply had been mined.

Supply and Demand

Countries without fixed foreign exchange rates can partially control how much of their currency circulates by adjusting the discount rate, changing reserve requirements, or engaging in open-market operations. With these options, a central bank can potentially impact a currency’s exchange rate.

The supply of bitcoin is impacted in two different ways. First, the bitcoin protocol allows new bitcoins to be created at a fixed rate. New bitcoins are introduced into the market when miners process blocks of transactions, and the rate at which new coins are introduced is designed to slow over time. For example, growth slowed from 6.9% (2016), to 4.4% (2017) to 4.0% (2018). This can create scenarios in which the demand for bitcoins increases at a faster rate than the supply increases, which can drive up the price. The slowing of bitcoin circulation growth is due to the halving of block rewards offered to bitcoin miners and can be thought of as artificial inflation for the cryptocurrency ecosystem.

Secondly, supply may also be impacted by the number of bitcoins the system allows to exist. This number is capped at 21 million, where once this number is reached, mining activities will no longer create new bitcoins. For example, the supply of bitcoin reached 18.587 million in December 2020, representing 88.5% of the supply of bitcoin that will ultimately be made available. Once 21 million bitcoins are in circulation, prices depend on whether it is considered practical (readily usable in transactions), legal, and in demand, which is determined by the popularity of other cryptocurrencies.

$61,683.86

Bitcoin’s all-time high price as of March 13, 2021.

The artificial inflation mechanism of the halving of block rewards will no longer have an impact on the price of the cryptocurrency. However, at the current rate of adjustment of block rewards, the last bitcoin is not set to be mined until the year 2140 or so.

Competition

While bitcoin may be the most well-known cryptocurrency, there are hundreds of other tokens vying for user attention. While bitcoin is still the dominant option concerning market capitalization, altcoins including Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT) are among its closest competitors as of March 2021. Further, new initial coin offerings (ICOs) are constantly on the horizon due to the relatively few barriers to entry. The crowded field is good news for investors because the widespread competition keeps prices down. Fortunately for bitcoin, its high visibility gives it an edge over its competitors.

Cost of Production

While bitcoins are virtual, they are nonetheless produced products and incur a real cost of production—with electricity consumption being the most important factor by far. Bitcoin «mining» as it is called, relies on a complicated cryptographic math problem that miners all compete to solve—the first one to do so is rewarded with a block of newly minted bitcoins and any transaction fees that have been accumulated since the last block was found.

What is unique about bitcoin production is that unlike other produced goods, bitcoin’s algorithm only allows for one block of bitcoins to be found, on average, once every ten minutes. That means the more producers (miners) that join in the competition for solving the math problem only have the effect of making that problem more difficult—and thus more expensive—to solve in order to preserve that ten-minute interval.

Research has shown that bitcoin’s market price is closely related to its marginal cost of production.

Availability on Currency Exchanges

Just as equity investors trade stocks over indexes like the NYSE, Nasdaq, and the FTSE, cryptocurrency investors trade cryptocurrencies over Coinbase, GDAX, and other exchanges. Similar to traditional currency exchanges, these platforms let investors trade cryptocurrency/currency pairs (e.g. BTC/USD or bitcoin/U.S. dollar).

The more popular an exchange becomes, the easier it may draw in additional participants to create a network effect. And by capitalizing on its market clout, it may set rules governing how other currencies are added. For example, the release of the Simple Agreement for Future Tokens (SAFT) framework seeks to define how ICOs could comply with securities regulations. Bitcoin’s presence on these exchanges implies a level of regulatory compliance, regardless of the legal gray area in which cryptocurrencies operate.

Regulations and Legal Matters

The rapid rise in the popularity of bitcoin and other cryptocurrencies has caused regulators to debate how to classify such digital assets. While the Securities and Exchange Commission (SEC) classifies cryptocurrencies as securities, the U.S. Commodity Futures Trading Commission (CFTC) considers bitcoin to be a commodity. This confusion over which regulator will set the rules for cryptocurrencies has created uncertainty—despite the surging market capitalizations.

Furthermore, the market has witnessed the rollout of many financial products that use bitcoin as an underlying asset, such as exchange-traded funds (ETFs), futures, and other derivatives.

This can impact prices in two ways. First, it provides bitcoin access to investors who cannot afford to purchase an actual bitcoin, thus increasing demand. Second, it can reduce price volatility by allowing institutional investors who believe bitcoin futures are overvalued or undervalued, to use their substantial resources to make bets that bitcoin’s price will move in the opposite direction.

Forks and Governance Stability

Because bitcoin is not governed by a central authority, it relies on developers and miners to process transactions and keep the blockchain secure. Software changes are consensus-driven, which tends to frustrate the bitcoin community, as fundamental issues typically take a long time to resolve.

The issue of scalability has been a particular pain point. The number of transactions that can be processed depends on the size of blocks, and bitcoin software is currently only able to process approximately three transactions per second. While this wasn’t a concern when there was little demand for cryptocurrencies, many worry that slow transaction speeds will push investors towards competitive cryptocurrencies.

The community is divided over the best way to increase the number of transactions. Changes to the rules governing the use of the underlying software are called “forks.” “Soft forks” pertain to rule changes that do not result in the creation of a new cryptocurrency, while “hard fork” software changes result in new cryptocurrencies. Past bitcoin hard forks have included bitcoin cash and bitcoin gold.

What Gives Bitcoin Value FAQs

How Is Bitcoin Value Calculated?

Bitcoin’s value is largely dependent on its supply and the market’s demand for it. Its value is also attributed to other factors, such as alternative digital currencies—including their supply and price—availability, and rewards for mining. Intrinsic value can also be estimated by computing the average marginal cost of production of a bitcoin at any given point in time, based on the block reward, price of electricity, energy efficiency of mining hardware, and the mining difficulty.

How Does Bitcoin Increase in Value?

As bitcoin nears its maximum limit, demand for it increases. The increased demand and limited supply push the price per bitcoin upward. Also, more institutions are investing in bitcoin and accepting it as a form of payment, thereby increasing its utility and making it a preferred medium of exchange among consumers.

Bitcoin is relatively safe due to cryptography and robust protocols and readily available through several exchanges. Also, you need not purchase a full bitcoin to have ownership of it. Fractional shares are available, increasing its attractiveness and value.

How Does Bitcoin Make Money?

Unlike stock, bitcoin does not represent ownership in a company or entity. Owning bitcoin is owning digital currency, much like owning US$1 is owning paper currency. Bitcoin miners earn rewards for completing blocks of verified transactions, and owners of bitcoin make money as the price per coin increases. For example, if you purchased 100 coins at $65.52 (100 x $65.52 = $6,552) on July 5, 2013 (bitcoin’s record low) and held it until its all-time high of $61,683.86 on March 13, 2021, you would have $6,168,386. 

Why Is Bitcoin So Valuable?

The demand for bitcoin is increasing, whereas the availability of new supply is shrinking, with the size of each block reduced by half, on average, every four years and the final bitcoin to be mined somewhere around the year 2140. Indeed, unlike most other produced goods, the rate of supply of new bitcoins cannot increase in response to spikes in demand.

A supply and demand imbalance results in increased prices. Some consumers, companies, and investors favor bitcoin for this and the potential ability to hedge inflation. The resulting popularity contributes to increased demand, and thus an increased price.

What Makes Bitcoin Prices Go Up and Down?

Bitcoin’s price fluctuates for various reasons, including media coverage, speculation, and availability. With negative press, some bitcoin owners panic and sell their shares, driving down the price. Vice versa with positive press. Also, when the volume of bitcoin sold on the market increases, the price decreases. As more institutions adopt bitcoin as an investment and medium of exchange, its price increases.

Also, many people have eroded confidence in their fiat currency and seek alternative sources to store their money. Because bitcoin is decentralized and unregulated, it is a favorable alternative, thus driving up its price.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own bitcoin.

Источник

Why is Bitcoin Valuable? How Does Cryptocurrency Have Value? Here’s What We Know

Anyone who has been in crypto long enough will be familiar with the question: how does cryptocurrency have value? Or, more likely, why is Bitcoin valuable? It’s a difficult question to answer, as it’s evident that Bitcoin and other cryptocurrencies have value, but it can be tough to explain why.

In this article, we’ll explain why crypto is valuable, how you can easily explain that value to other people, and what signals you can use to gauge whether a cryptocurrency is fairly valued or not. We’ll start with the most popular coin of them all, Bitcoin.

In this article

How Does Bitcoin Have Value?

There are a handful of reasons why Bitcoin has value.

1) Bitcoin cannot be seized. Citizens of countries like Argentina and Lebanon will be well aware of how the government can interfere with money stored in a person’s bank account. When you deposit cash in the bank, nobody tells you that you’re handing control of your money over to the bank and government.

Even in places like the United States, there is asset “forfeiture,” where the government can freeze a person’s bank account and debit cards at any time. Typically this happens to criminals; however, it has also happened to those who’ve committed no crime. Unlike banked money, Bitcoin cannot be frozen or stolen by the government.

2) Bitcoin is a way to send value around the world, from one Bitcoin Wallet to another. A great way to explain Bitcoin to a family member (especially someone older) is to say, Bitcoin is like a money order that you can send anywhere in the world. It will get there in around 10 minutes and it will only cost a few dollars or less to send.

Although Bitcoin is slower than other cryptocurrencies, it’s still exponentially faster than the existing financial system. Even sending money between two first world countries, like Sweden and the United States, can take five days and cost nearly 10% in fees. By comparison, Bitcoin is a much better option.

3) Bitcoin is a deflationary currency. Central banks around the world are printing money like it’s going out of style. Amidst the backdrop of monetary inflation, Bitcoin is a hard asset (like gold) with a set supply rate. No central banker or meddlesome economist can print more Bitcoin. Scarcity is a key piece of what makes a currency valuable, and Bitcoin is one of the scarcest assets on the planet.

The Journey Continues

These are just three of the more obvious examples of why Bitcoin has value. For those interested in going further down the rabbit hole, Robert Breedlove has done some excellent work explaining why Bitcoin is valuable. His articles are long and complex, but they have granted Breedlove a minor celebrity within the Bitcoin community.

How Does Ethereum Have Value?

Smart contracts are the primary reason that Ethereum has value. Bitcoin is extremely robust, and while it’s designed to resist attacks by nation-states, it’s limited in its functionality. Simple projects can be built on Bitcoin, like colored Bitcoins; however, complex transactions are impossible. В

Ethereum is the opposite since it enables all sorts of complex financial transactions:

• Stablecoin loans collateralized by ETH and other assets like BAT and USDC
• High interest “bank accounts” where investors can earn

5 to 10% a year (interest rates vary based on market conditions) by lending their stablecoins to traders

No loss lotteries. A pool of people deposits a stablecoin, which is then lent out to earn interest. After a certain period, a winner is randomly selected. The winner collects all of the interest earned, while the stablecoins are returned to the lottery participants. A brand new form of lottery, with no losers but a winner!

Synthetic tokens which track the price of existing assets like gold or the S&P 500 stock market index

Complex financial contracts suitable for cross-border trade

The list goes on and what’s so exciting about Ethereum is that new projects are always coming online. This brings us to another reason that Ethereum has value: its developer pool. Ethereum has more developers working on it than any other cryptocurrency. That means that Ethereum is continuously being improved which contributes to its value.

Finally, Ethereum is the home to DeFi, one of the hottest trends in crypto right now. The more popular DeFi is, the more valuable Ethereum will become. В

Why is Crypto Valuable?

Why does cryptocurrency have value — that is, cryptos aside from Bitcoin and Ethereum?

This is a difficult question to answer. It’s akin to asking: why do commodities have value? Oil is valuable for a very different reason than copper or sheep’s wool.

A project like Monero or Grin is valuable because it promises anonymous transactions. Far from being the criminals’ tool, anonymous transactions are important because people should have the right to make purchases without others knowing about it.

XRP, Stellar, and Nano (among others) are valuable because they offer speedy transactions that settle in just a couple of seconds. It’s possible that one of these assets will become the cryptocurrency that people use when they buy a cup of coffee or other everyday purchases.

Bitcoin is valuable because it’s censorship-resistant and has the largest security network out of any cryptocurrency. When a person or organization wants to store their money on the safest network, they choose Bitcoin.

Ethereum, NEO, Cardano and Tezos have value because they enable smart contracts. Programmable money is a feature unique to blockchains, and the financial and business world hasn’t even begun to realize how valuable this could be.

A few other examples of why a cryptocurrency can have value.

• Blockchain voting
• Supply chain tracking
• Blockchain secured identities which cannot be hacked
• Decentralized exchanges
• Stablecoins based on any fiat currency in the world (e.g. USD, EUR, JPY, etc.)

Cryptocurrencies are valuable because they serve a role. Those who don’t serve a role or those who fail to gain adoption will eventually lose their value.

How is the Value of Cryptocurrency Determined?

This is the billion-dollar question and there is no good answer. We’re still in the early days of crypto and it’s difficult to assess what the fair market value for a project is.

Take oil, for example. When oil was first discovered, people realized that it had value since they could use it to warm their homes. Who could have predicted though that someday in the future, oil would be used to make plastic or propel jumbo jets around the world?

The commodity didn’t change, yet its value increased as people understood all of the ways in which it could be used.

The same is true for crypto. We don’t know yet all of the ways that cryptocurrency will be used. Will Bitcoin become the world’s reserve currency? Will an entirely new financial system with billions of users be built on Ethereum?

We don’t know yet, and so any framework that tries to determine the value of cryptocurrency is likely to break at some point.

That being said, there is one statistic that is good at predicting how valuable a project is. Cryptocurrencies are a network, like Facebook or email, and the more people that use the network, the more valuable it is.

Bitcoin and Ethereum are valuable because there are hundreds of thousands of active users (and millions of occasional users). The more people that use a cryptocurrency, the more valuable that coin is likely to be.

How Does the Value of Cryptocurrency Increase (How Does Cryptocurrency Gain Value)?

A big reason that a cryptocurrency goes up in value is that the project is being improved. For instance, Ethereum and Bitcoin both have thousands of developers working on the protocol, which naturally helps to make the coins more valuable.

Bitcoin is becoming more robust over time just as Ethereum is scaling so that it can handle more transactions per second.

The better the cryptocurrency, the more people want to hold it. As demand goes up, so does the price. Typically the cryptocurrencies with lackluster price movement, or even price depreciation, are the ones where the developer community is small or has abandoned the project altogether.

Bitcoin Value

One of the easiest ways to keep track of Bitcoin’s value is with the Exodus crypto charts. The Exodus charts are modern and easy to read, even for beginners.

Exodus Bitcoin chart

Besides Bitcoin, the Exodus charts are also available for dozens of other cryptocurrencies to always keep track of the coins you care about the most.

How Does Cryptocurrency Have Value: Conclusion

So the next time you hear someone asking how does cryptocurrency have value, you can inform them using the information in this article рџ™‚

Bitcoin and Ethereum have use cases like scarcity and programmable transactions respectively, while other cryptos like XRP and Nano offer lightning-fast and cheap transactions.

As more people use crypto over time, you can expect crypto to become more valuable, as has been the case in recent years.

All in all, crypto has many supporters as well as critics. While we at Exodus believe crypto to be a game-changing technology, only time will tell whether or not we’re right 😉

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

Источник