How Is Bitcoin Value Determined? How Does The Bitcoin Work?

  • by

As more and more people are aware of Bitcoin and are interested in it, particularly as prices are increasing, we often ask: Why does Bitcoin have value?

Most people find it hard to understand how anything that only exists digitally can have any meaning.

At the end of the day, bitcoins and all cryptocurrencies, in general, are’ digital money.’ Although they do not operate in the same way as the fiat currency, they are still bound to certain economic laws. Demand and supply, which are the two dominant powers controlling commodity prices daily, also have a significant impact on Bitcoins ‘ prices.

The economic principles common to the fiat currency do not necessarily apply to Bitcoins. There are, however, some definitions that overlap. Compared to a real-world asset, the best way to understand how the price of Bitcoins is calculated is through analogy with gold.

Although Bitcoins are a fiat currency substitute, they are better compared to Gold. This is because Bitcoins are also complete, like Gold. Perhaps there will be a day when gold will be extracted and exhausted under the surface of the earth. Likewise, Bitcoins too, are finite in number, and Bitcoins are also consumed one day. Although one can not estimate reliably how much gold is still to be extracted, we certainly know that there are 21 million bitcoins, 16 million of which have been mined.

Buying a bitcoin is not like buying a stock or a bond because bitcoin is not a business. Therefore, no corporate balance sheets or Form 10-Ks are needed for analysis. And unlike investment in traditional currencies, Bitcoin is not issued by a central bank or sponsored by a government, so monetary policy, inflation rates, and incentives for economic growth that usually affect currency value do not apply to Bitcoin.

Supply and Demand

Countries without fixed foreign exchange rates can partially test the value of their currency by raising the discount rate, modifying reserve requirements and taking part in open market activities. Both options will potentially impact the exchange rate of a currency.

Bitcoin supply is affected in two different ways. Next, the bitcoin protocol permits the creation of new bitcoins at a fixed rate. As miners process transaction blocks, new bitcoins are added to the market and the rate at which the new coins are introduced is programmed to slow down over time. Case in point: growth slowed from 9.8% (2015) to 6.9% (2016) and has slowed to 4.3% (2017). In this way, the demand for Bitcoins will rise at a faster rate than the supply increases, which can increase the price.

Furthermore, the number of bitcoins that the system allows remaining can also impact supply. That number is limited to 21 million, where mining operations will no longer create new bitcoins when this number has been reached. For example. For example. Bitcoin supply reached 16.8 million at the end of January 2017, representing 80 percent of the bitcoin supply finally made accessible. When 21 million Bitcoins are in circulation, rates depend on whether they are seen as realistic (free to use in transactions), legal and demand based on the popularity of other cryptocurrencies. (See, also, just 20 Percent Of Total Bitcoins Remain To Be Mined)

Competition

Although bitcoin may be the most popular cryptocurrency, many others exist, including ethereum, litecoin, dogecoin, and peercoin. And, with very few barriers to entry, new initial coin offerings (ICOs) are constantly on the horizon. The crowded environment is good news for investors as the intense competition ensures price reductions. Fortunately, its high visibility gives Bitcoin an advantage over its rivals.

Cost of Production

Although Bitcoins are virtual, they are nonetheless products produced and incur real production cost, with the most important factor by far in electricity consumption. Bitcoin’s mining is based on a complex cryptographic math problem that miners are all participating in overcoming, the first being rewarded with a block of freshly mined Bitcoins and any transaction charges that have been deposited since the last block was discovered. The unique feature of bitcoin development is that, unlike other products, bitcoin algorithms only allow one block of bitcoins to be found once every ten minutes on average. The more producers (miners) who search for mathematical solutions, the only effect is to make it harder-and, thus, more costly-to resolve this problem, to maintain the 10 minutes.

Market sentiments

Business expectations, together with economic laws, control Bitcoins ‘ markets and prices.

Likewise, there are other incidents-a significant fluctuations in the price of Bitcoins were observed when BTC-E, a famous exchange, was shut down. Likewise, the value of Bitcoins again declined when the Silk Road, a website that was funded by cryptocurrencies, was shut down.

Government policies

Price too is affected by government policies. If the US Government were someday to regulate Bitcoins, a lot of people would sell their coins and liquidate them easily-crashing the whole Bitcoin economy.

Events That Can Change Bitcoin’s Price

The Bitcoin economy is spoken of by many things. If a large government falls into a situation where it is unsure how to control bitcoin, like with China, then the price will fall. In criminal cases, the same can happen. The price of Bitcoin plummeted when the Silk Road drug trade platform, which used Bitcoin as its currency, vanished.

Certain variables also affect the price of Bitcoin. Only so many bitcoins are available and are generated at a predictable rate. The control of these bitcoins is distributed unevenly. Some Bitcoin companies have huge quantities of stuff. In combination with the lack of liquidity, controlling the market is easy.

In some cases, large exchanges who sell bitcoins for high volumes will lower prices. Such a broker, BearWhale, briefly collapsed the market.

The Economics of Bitcoin

Let’s quickly take a look at the real-world economic principles for the world of Bitcoins:

  • Utility: one of Bitcoin’s biggest reasons for any price is that it has a utility. Over time a lot of dealers have started accepting Bitcoins, and this number will grow as Bitcoins become more knowledgeable.
  • Scarcity: As mentioned above, it has a so high value due to the scarcity of Bitcoins (similar to gold). It’s not only scarcity, though, but scarcity in conjunction with utility. Bitcoins are not only limited in number but also useful.

Therefore, 1 Bitcoin is equivalent to the other Gold. They both have the same meaning. 1 gram of gold you own is the same as the 1 gram of gold I own-the same with Bitcoins.

The gold comparisons don’t just end there. Unlike gold, bitcoin is divisible. You could have 100 mg sold if you have one gram of gold and want to liquidate some pieces, while the rest can still be with you. Similar to Bitcoins, splitting is very simple. A bitcoin can fall to 0.00000001 BTC. This is a Bitcoin’s smallest divisible portion. Satoshi 0.00000001 BTC= 1. It was named after Satoshi Nakamoto, the founder of Bitcoins.

Back to the utility, the highest use of Bitcoins is comparable to other cryptocurrencies that happened after it occurred. There are many cryptocurrencies developed for one reason. Nonetheless, Bitcoin is a multi-purpose currency that is still the most accessible cryptocurrency, while still far from mainstream acceptability. It is doubtful, at least in the short run, than any other crypto-currency can succeed at the Bitcoin level.

The utility rises with recognition. As more and more people continue to use Bitcoins, the services will rise as some traders start to accept them.

A rapid price increase is not a bubble. An artificial overstatement that leads to a sudden downward correction is a bubble. Choices by hundreds of thousands of market participants based on individual human actions have caused Bitcoin’s price to fluctuate since the consumer is searching for price discovery. Reasons for a shift in sentiment might include loss of trust in Bitcoin, a substantial price and value gap that is not focused on Bitcoin economy fundamentals, increased press coverage stimulating investment demand, fears of uncertainty, and outdated irrational exuberance and covetousness.

Questions are always raised and every time the price falls or increases, fingers will always be pointed to Bitcoins. For now, though, this is indeed a good chance to invest. Nonetheless, it is crucial to know what you are investing in, and we hope that this Cryptocurrencies guide will help you understand it better!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.