Last Updated on August 29, 2019 by harsh vasistha
What determines Bitcoin value and price?
The answer to this “what determines Bitcoin value and price?” 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 and altcoins. Read how?
- Bitcoin and altcoins are Limited in Supply like Gold Most people still have a difficult time understanding what makes Bitcoin value. A good way to look at it is to compare it to gold.
- Just like gold, the cryptocurrencies have a limited supply. The total number of Bitcoins cryptocurrency that will ever be produced is set at 21,000,000 coins. “Although it might not sound like much, it’s quite enough.” But Bitcoin currency will not reach to infinity so it is scarce in a sense
- Same is true for other top cryptocurrencies
- To date, there are already 15 million Bitcoins, but it’s estimated that it will take more than 50 years before all 21 million coins will be mined out.
- 1. It is useful because it is built on open protocols, meaning, anyone can innovate on top of it and make the system better
- 2. Bitcoin is also a better option for certain purposes, such as seamless digital transfers and use across borders.
- 3. 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.
- Unlike fiat currency that can be reversed even months after they were initiated, a Bitcoin transaction can’t be turned around by the sender.
- You don’t need to provide any personal information when paying with Bitcoin. The only information required is the bitcoin wallet address and the amount you’re sending.
- Bitcoin transactions are public, everyone can see them.
- Bitcoin currency due to its transparency can’t be used for the illegal purpose, unlike fiat currency.
- It is not even prone to inflation, unlike fiat currency.
- Bitcoin transactions can’t be censored, blocked, and diverted
The combination of these two elements explained How does Bitcoin have value and price. But Bitcoin price is not the same as Bitcoin value.
Bitcoin 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 and other promising cryptocurrencies especially Ripple 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.
Conclusion – what determines Bitcoin value and price
In short: if something is both useful and scarce, it will demand value and a price.
Bitcoin cryptocurrency is both useful and scarce, so does Bitcoin has a value and the price is determined by supply and demand.
So this explains what determines Bitcoin value and price