February 21st, 2018
As a growing number of people from around the world are becoming aware of Bitcoin, the question is often asked: “How is Bitcoin valued?” Many individuals find this concept tough to grasp. How can something which only exists digitally have any value at all? The answer to this question is simple, and it is related to basic economics: utility, scarcity, supply, and demand.
Seeing the recent Bitcoin price increase, many individuals are interested in this new digital currency. By definition, if something is both useful and rare, it must have a value and demand a specific price.
Take gold for example. Why does gold cost so much? Because it is rare. This natural metal has some uses from which customers derive satisfaction. The combination of these two basic elements creates a value that is determined by supply and demand.
So, How Is This Related to Bitcoin?
Like gold and other precious metals, Bitcoin is also scarce, and its supply is limited to 21 million units. Currently, there is over 16.2 million Bitcoin in circulation. This cap is well known, and makes it scarce in the market. However, to have value, Bitcoin must be useful too. Bitcoin creates utility in numerous ways. Like natural precious metals, Bitcoin is fungible, which means one is similar to another; it is divisible and can be easily verified.
Bitcoin Is Not Only Scarce – It Also Has Utility
Bitcoin has desirable properties. It is a borderless, fast, and decentralized new system that has the potential to change the whole financial world for the better. Bitcoin has value as a payment system and as an asset class. This new payment system is useful because it is built on protocols that make it so anyone can use this new concept and make the system better.
Bitcoin has undeniable utility when it is compared to other and newer cryptocurrencies. There is no other digital currency which is so widely used and integrated into the present day. Bitcoin comes with tremendous potential, and its exponential growth is proving this fact. The value of Bitcoin is increasing with time as more and more enthusiasts begin using it. Many merchants and businesses are accepting it as a mode of payment. Today, there are thousands of merchants around the globe accepting bitcoin as a mode of payment, thus proving the growing use of this new currency.
Take telephones as an example. When the first telephone came out on the market, people saw very little value in it. But with time, as more and more people started using it, the telephone become exponentially more popular. Today, almost everyone owns and uses a cell phone. The same is true for digital currencies: the more people start using and understanding this concept, the more useful it will become in the future.
How Is Bitcoin price determined?
The price of Bitcoin is not similar to its value. Its price is determined by the market, where it is traded. This is all based on its supply and demand. This process is similar to the way your secondhand car is valued, a bag of apples are valued in the supermarket, and one ounce of gold is valued. In short, it is similar to just about everything else in the market. Traders with bank accounts in respective countries can actually trade Bitcoin, and there are numerous platforms available where you can trade with ease.
Put simply, the ongoing interaction between sellers and buyers trading each other determines the specific price of Bitcoin. However, it is important when determining the price that one considers the amount buyers are willing to pay for the future value of this item. In other words, if the market believes in the price of something like Bitcoin, or that a stock or a property will increase in the future, they will more likely pay for it now.
There are numerous instances where Bitcoin use is increasing or evolving with time. Technologies are changing, and many enthusiasts are optimistic about this new concept. There may be many new concepts coming up that we haven’t thought of yet.