How Is the Value of Bitcoin Determined?

Let’s look at a few reasons that move the price of Bitcoin in one direction or the other…

How Is the Value of Bitcoin Determined?

The value of Bitcoin has been growing and dropping rapidly. It may be a total mystery for some people why the world’s first cryptocurrency is so volatile, but there is some logic behind the price movements. In this article, we’ll delve into a few reasons that move the price of Bitcoin in one direction or the other; and many, if not all, of these factors also affect the price of other cryptocurrencies, as well.

Before we begin, let’s remember that many people compare Bitcoin to gold, adding that it has many properties of the gold, including:

  • Fungibility – with one unit being equivalent to another.
  • Divisibility – meaning it can be divided into smaller units of value.
  • Acceptable – it is widely accepted as medium of exchange
  • Limited in supply – like gold, Bitcoin’s supply is capped and constant (there will only be 21 million bitcoins)
  • Portable – both gold and Bitcoin can be carried along and exchanged.
  • Durable – can be used a number of times without degrading.

For what it matters, the world’s regular aka fiat currencies don’t fit all the criteria listed above, but we still use them as “regular money.” Now let’s look at a few factors determining the price of Bitcoin, starting with…

1. Supply & Demand

Arguably, this is the number one factor that determines the price of Bitcoin. The more people ask to buy Bitcoin, the more it costs. In that sense, Bitcoin — and other cryptocurrencies for that matter — is similar to any other good traded on an open market.

So rather than someone determining the price, it is the market that determines the value of Bitcoin on a per-second basis. Someone buys a Bitcoin, the price goes up; someone sells it, the price goes down. Add volume to the equation, and you get huge shifts in price, which we saw happening at the end of last and at the start of this year.

2. World news

Related to the previous point – once the World Economic Forum in Davos has ended, the price of Bitcoin went down. The reason was that the world leaders criticized the crypto market, and that was reflected on the supply and demand, and consequently on the price of Bitcoin and other virtual currencies.

However, when some horrible event strikes, the price of Bitcoin goes through the roof, no matter what the world leaders are saying. Simply put – this is something they can’t control, and they obviously don’t like it.

We on the other hand love the idea that some people we don’t know have little to do with our money. 😉

3. Network effect

The more people use or own something, the more it is worth. Think of Bitcoin as an email or a fax machine — those two very useful inventions would be useless if there were only a handful of people who could receive messages sent through Internet or fax.

Today, Bitcoin is accepted at hundreds of thousands of locations, which means it is quickly becoming “real money.” Also there is a growing network of Bitcoin ATMs around the world — so called BTMs — that make cryptocurrencies easier to use by the general public. And with more people joining the network, the entire network and its underlying (crypto)currency gains in value.

4. Bitcoin is useful

Sending money from one part of the world to the other is easier with cryptocurrencies. Sure, the price of Bitcoin transactions have skyrocketed in the past few months, but with planned improvements such as the Lightning Network – this problem will be solved, making for fast and affordable money transfers all around the world. Compared to the fees involved in sending money via Western Union or Moneygram, Bitcoin — and other cryptocurrencies — are (will be) dead cheap.

Also, as it is “going mainstream,” Bitcoin will be accepted by more and more merchants, enabling users to dump their paper money for their more secure digital equivalent.

Speaking of which…

5. Bitcoin is secure

As a decentralized project, Bitcoin is far more secure than pretty much any other payment system in the world. Right now, there are more than 20,000 computers or nodes securing the network where they maintain an independent copy of the Bitcoin’s blockchain so that no one can double spend. In turn, hacking into the Bitcoin network involves hacking into those 20,000+ computers at the same time, and even then it’s not certain that a serious damage could be made.

The same property makes Bitcoin censorship-resistant, which is especially important in countries with corrupt governments.

And more…

This is not the complete list, with some other reasons also helping push Bitcoin in one direction or the other. For instance, the introduction of Bitcoin futures had a positive effects on the price of Bitcoin, and chances are something similar will happen once the Lightning Network is implemented. Also, we saw — again — positive effects of hedge funds entering the crypto market, and we are still in the early days of this revolution. No matter what you’ve heard, the story of Bitcoin is just getting started; the question is – are you on board?

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