Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and is used to prove ownership.
People often ask: “Why exactly does Bitcoin have value?” “How Bitcoin price is determined?”
Many people find it difficult to explain how something which only exists digitally can have any value at all.
The answer to this question is rather simple and it lies in basic economics such as:
- The number of competing cryptocurrencies
- Regulations governing its sale
- Its internal governance.
By definition, if something is both rare (scarce) and useful (utility) it must have value and demand a specific price, with all other things being equal. Take gold, for example. Why does gold cost as much as it does? Put simply, it is relatively expensive because it is rare, hard to find and limited in supply. Gold also has some uses to which consumers derive satisfaction from.
The combination of these two elements creates value by which price is determined based on the market’s supply and demand. Like gold, Bitcoin is also scarce: its supply is limited. There are currently just over 17.9m Bitcoin in circulation and the maximum that will ever exist is capped at 21 million. This set cap is well known, making its scarcity transparent.
However, to have value, Bitcoin must also be useful. Bitcoin creates utility in a number of ways.
Like gold, Bitcoin is perfectly fungible, it is divisible (you can pay someone a small fraction of Bitcoin, should you want to) and easily verifiable (via the Blockchain).
Bitcoin is not just scarce, it also has utility
Bitcoin also has other desirable properties. It is fast, borderless and decentralized with the potential to change the financial world for better. Not only does it currently have value as a payment system, but also as an asset class (a store of wealth). It is also useful because it is built on open protocols, meaning, anyone can innovate on top of it and make the system better.
Bitcoin also has undeniable utility even when compared to other, newer cryptocurrencies. There is simply no other cryptocurrency that is as widely used and integrated at this point in time. Through network effects, we’re starting to see exponential growth, which creates value as more and more people start using Bitcoin and more merchants accepting it as a means of payment.
Today, there are already thousands of merchants around the world accepting Bitcoin as a means of payment, thus proving the growing usefulness of it. Take telephones, for example. 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.
We hope this article helped you to understand how Bitcoin price is valued. If you would like to you buy your very own Bitcoin, you can do that easily on our platform The Peak.