7 September, AtoZ Markets – Bitcoin has been the center of media attention once it set sail back in 2009. The cryptocurrency-pioneer offers an efficient means of transferring money, thus also saving time and resources while being a great alternative to the central bank that controls the money.
In the past year, there have been a lot of discussions held regarding the price of Bitcoin. Many of the traditional market investors question the value behind this cryptocurrency and try to figure out how to price Bitcoin.
What is the value behind Bitcoin, and why is Bitcoin worth money? How do you determine a Bitcoin’s price?
We will try to answer these and other questions in our today’s article.
Why Does Bitcoin have value?
The answer to this question is quite simple. If we take a look at the basics of economics, which are supply, demand, utility, and scarcity, we will have our answer.
Now, according to economics, something has value if it is both scarce and useful. This something will have value and demand at a specific price, with all other things being equal. For instance, let’s take a look at gold.
Why does gold cost this much?
Gold is somewhat expensive due to several reasons:
- It is scarce – it is hard to find and extract, limited in supply, and rare.
- It is useful – people use gold for a variety of different reasons.
The combination of these two factors forms a value by which price is further determined. The price is also based on supply and demand.
The same principles apply to Bitcoin. Just like gold, Bitcoin has a limited supply at 21 million BTC, and everyone in the cryptocurrency community knows that.
However, in order to have value, Bitcoin also needs to satisfy the second condition of our equation – it needs to be useful. And, indeed, it is. Bitcoin is quite useful in several ways.
Similarly to gold, Bitcoin is mutually interchangeable, meaning that one BTC is similar to another. Bitcoin is also divisible and verifiable. The first point implies that it is possible to pay with a fraction of a Bitcoin, and another one stands for the ability of nodes to verify Bitcoin transactions.
Therefore, we have got the perfect equation for Bitcoin’s value – it is rare or scarce and also useful, meaning it has utility.
Why is Bitcoin useful?
Aside from this, Bitcoin also offers several other desirable properties. Such as it is decentralized and borderless. And it comes as something innovative and groundbreaking. It has the potential to change the whole global financial system.
Presently, Bitcoin has value as a payment system and an asset class or an alternative for storing wealth. It is useful because it is built on open protocols – this implies that anyone can use it as a base for innovation and improve the system.
BTC also features utility even when compared to some of the new cryptocurrencies. There is no other digital currency in the world that has such wide use and integration. Via the network effects, Bitcoin experiences the increase in growth, which creates value as more and more people start using BTC.
How the price of Bitcoin is determined
It is very important to differentiate between the value of Bitcoin and its price. These are two things that you should not confuse. The price of Bitcoin is determined by the market – by means of supply and demand. The value of Bitcoin is something that we have discussed earlier.
Bitcoin traders set the price of Bitcoin by trading on cryptocurrency exchanges. The price of Bitcoin is determined by the interaction between sellers and buyers trading with each other.
Think we missed something? Let us know in the comments section below.