Bitcoin and other cryptocurrencies can be notoriously volatile when it comes to their sustainability as investments. And with Bitcoin surging at the end of 2020 and reaching above $60,000 in April 2021, many prospective investors are still unclear as to how Bitcoin's value is determined. We thought we would seek to answer that question.
The first thing we must understand is why Bitcoin and the many "Altcoins" out there have value in the first place. Ultimately, this is simply because Bitcoin is another form of money; cryptocurrencies have all the key characteristics of fiat currencies: it's durable, portable, fungible, scarce, and divisible. However, unlike more traditional currencies, Bitcoin doesn't rely on metals like gold or silver, but on mathematics. With these attributes, Bitcoin's success is best measured by its accelerating adaptation and utilization. As with all currencies, Bitcoin's value comes directly from people willing to accept them as payment.
So, now we know why Bitcoin has value, but how do we calculate it? Like many commodities, products, and, yes, currencies, it all comes down to the principles of supply and demand. When demand increases, price increases; when demand falls, price falls. But what about supply? There are only ever a limited number of Bitcoins available in circulation and new Bitcoins are created at a predictable and decreasing rate, which means demand must follow this level of inflation to keep the price stable.
Unlike traditional currencies, Bitcoin is not issued by a central bank or government. So, issues of monetary policy, inflation, and economic growth measurements that influence fiat currencies have no effect on Bitcoin. Rather, in addition to the basic principles of supply and demand the following factors do impact Bitcoin's value:
- The cost of producing a Bitcoin through the mining process,
- The rewards issued to Bitcoin miners for verifying transactions,
- The number of competing cryptocurrencies,
- The exchanges Bitcoin trades on,
- Government regulations concerning Bitcoin transactions, and
- Bitcoin's internal governance.
There's no one formula for determining Bitcoin's price, there's a lot more economics behind it.
All the foregoing means that Bitcoin is not determined by people or governments, but by the market itself. This makes determining a specific formula pretty much impossible. What also makes this difficult is the fact that prices vary by the exchange location. See, Bitcoin isn't traded in one place, but on multiple exchanges, each with their own average prices, based on the trades being made by the exchanges at any given time. So, if you want to buy and sell Bitcoin, you have to choose a particular exchange, which will have its average price. The price of Bitcoin will change from time to time, depending on which exchange the information comes from.
So, when all is said and done, supply and demand, one of the fundamentals of economics, is ultimately what determines the price of Bitcoin and every other cryptocurrency. But what does the future hold for Bitcoin, altcoins, and their prices? Well, it's hard to tell and the future is always difficult to predict, but as Bitcoin's user base grows and more people own Bitcoin, the future continues to be bright for cryptocurrencies.