What makes Bitcoin value and how it's price is determined?
The answer to this question is rather simple and it lies in basic economics:
scarcity, utility, supply, and demand.
Take an example of the diamond. Diamond is valuable because it is rare(scarcity), hard to find, and limited in supply. Diamond also has some uses in which consumers derive satisfaction from (utility).
Same is true for Bitcoin.
Bitcoin is also rare currency because it was innovated in such a way that only 21 million bitcoin can be mined.
- It is useful because it is built on open protocols, meaning, anyone can innovate on top of it and make the system better
- Bitcoin is also a better option for certain purposes, such as seamless digital transfers and use across borders.
- Unlike, fiat money produced by central government banks, there is a cap set on total Bitcoins, limiting how much the currency can be devalued through inflation.
The combination of these two elements creates Bitcoin value. But Bitcoin price is not the same as Bitcoin value.
Price is determined, based on the market in which it trades by means of “supply and demand”.
This is the same way the price of a secondhand vehicle, a bag of sugar in the supermarket, and just about everything else is determined.
Hence, like any other fiat currency, bitcoin follows the basic rules of supply and demand.
Take an example of the telephone, when the first telephone came out, it had very little value in that hardly anyone used it yet. However, as more and more people started using it, the usefulness grew exponentially.
The same is true for Bitcoin: the more people who start using and understanding it, the more useful it will become to everyone else.
It has generated an ecosystem in which many people are willing to trade and accept it.
Today, there are already thousands of merchants around the world accepting Bitcoin as a means of payment, thus proving the demand for it.
Finally, a key benefit of bitcoin is “censorship resistance” its ability to be used for transactions that would normally be censored by other payment networks.
In short: if something is both useful and scarce, it will demand value and a price.
Bitcoin is both useful and scarce, so it has a value and a price, determined by supply and demand.
And remember that the Bitcoin value and Bitcoin price are not synonymous and it can be seen on different Bitcoin exchanges where the price of Bitcoin is not same.