No central bank or entity defines the value of Bitcoin. Cryptocurrencies differ from fiat currencies like the US-Dollar and Euro because a series of factors impact their prices instead of a central authority.
Bitcoin has offered several reasons for the public to believe in it – countless investment opportunities, real-use cases, and the advancements it brings in the financial world. The general trust in digital currency is one of the reasons why a single token values thousands of dollars, even in a bear market.
However, beginner traders still wonder what makes Bitcoin so valuable, considering its notorious volatility. It’s common for it to decrease or increase in value by 5% or more in a single day. This article is meant to give them a better understanding of what makes Bitcoin the most valuable digital currency in the market.
To understand why Bitcoin is valuable, we must dive into why cryptocurrencies are so expensive
Before listing the factors that make Bitcoin the most valuable cryptocurrency, we need to understand why digital currencies’ prices go up and down. As mentioned earlier, no central authority backs digital currencies in the same way governments do with fiat currencies. Government backing makes traditional money more trustworthy among the public. Digital currencies, on the other hand, are generally decentralised and take their value from sources like competition, supply and demand, governance, availability on exchanges, and cost of production.
And often, a digital token will have value as long as the public believes it so.
Why does Bitcoin have value?
If it were to explain how Bitcoin price USD evolves, we would say that when demand for the token increases, the price goes up, and when the demand drops, so does the price. A series of factors impact the demand, from economic developments to advances in the prices of bonds and stocks and trade wars.
Unlike traditional money, which is subjected to economic and political developments, Bitcoin is a fully decentralised system, so no central authority regulates its value. The creation of new Bitcoin tokens follows a strict protocol because a limited number of coins could exist in circulation.
What rules does the Bitcoin network follow?
All transactions within the blockchain are coded and stored forever. Miners compete to be the first to solve complex mathematical problems that reward them with tokens. The first node that mines a valid block receives the established reward. Once the network participants confirm its validity, a new block is added to the blockchain every 10 minutes. All transactions in the Bitcoin ecosystem have followed the same protocol since Satoshi Nakamoto created the Genesis Block, the first-ever block of Bitcoin. The only change in protocol is the reward amount miners get.
Why is Bitcoin’s price volatile?
A quick look at the market shows that Bitcoin has the highest trading volume among digital currencies. However, the crypto market is small compared to others, and asset prices make bigger moves, even if fewer resources are involved. Financial experts believe that if Bitcoin had the same trading volume as gold or other precious metals, its level of volatility would have been similar. However, the number of Bitcoin tokens available in circulation is low, and the creation of new coins follows a strict protocol, so demand follows a deflationary behaviour that impacts the price. Factors like currency risks for crypto holders, uncertainty in the sector, and news can also impact its value.
Effects of supply on Bitcoin’s price
The supply of Bitcoin has a paramount role in determining its value. As a scarce asset, it has a high price because, since its introduction on the market, it has been publicised that there won’t be more than 21 million coins, and a limited amount is mined every year. The protocol allows the network to produce a fixed number of coins, and the rate is designed to slow down in the future. Satoshi Nakamoto established that the rate at which Bitcoin is created is reduced every four years. The process is also known as halving, which implies cutting the number of coins offered to reward miners in half.
Because the supply of Bitcoin is decreasing, the demand is higher than ever, so the price goes up.
Price and Demand
Bitcoin has attracted the attention of investors since its launch on the market, and the increased demand triggered a spike in media coverage and price. Entrepreneurs and financial experts have touted the cryptocurrency’s value, convincing investors to add it to their portfolios. Bitcoin became widely accepted in countries with devalued fiat currencies and high inflation, like Venezuela and among entrepreneurs who want to transfer large sums of money without dealing with intermediaries.
This, paired with the shrinkage of future supply, caused a rise in Bitcoin’s price. However, the value fluctuates in periods of bear and bull markets.
Production costs
Similar to other assets, production costs also impact Bitcoin’s value. Research shows that the digital currency’s price is closely connected with the marginal cost of production. The production costs for bitcoin include the fixed costs for electricity and infrastructure the miners need to confirm new blocks and the expenses associated with the algorithm’s difficulty levels. The different algorithm levels can slow down or hasten the production of blocks, affecting the overall supply of Bitcoin and impacting the price.
Competition
Bitcoin might be the most famous digital currency, but thousands of other cryptocurrencies exist in the sector, competing for investors’ funds. Even if it still dominates the market, its influence has waned over the last few years. In 2017 it counted for over 80% of the market cap, but by 2022, it dropped to less than 50%. The main reason behind the drop in market cap is the rise in the popularity of altcoins. Ethereum has emerged as a strong competitor due to its several use cases and unique features. Crypto investors have started recognising Ethereum’s potential due to its modern financial infrastructure. Crypto specialists think that Bitcoin’s price shouldn’t matter so much for investors if they intend to use it for the purpose Satoshi Nakamoto created it, to be a store of value and means of transaction.