Oh, beautiful bitcoin. Everyone sees you on the news every time you go up or down in price. Many admire you from afar… but why haven’t they come close?
Well, some out of fear, some out of ignorance. And there are hundreds of questions regarding bitcoin and cryptocurrencies in general.
What we do know is that all this curiosity has boosted the popularity of bitcoin and all altcoins. Yet, one question stands out for many people:
How did bitcoin become worth thousands of dollars? What is its value and how is it determined?
Here is our explanation below:
How Is Bitcoin Valued?
Bitcoin is like a stock. The price of bitcoin varies based on buying and selling. In other words, depending on the buying or selling pressure, its price will go up or down.
Yet, there is still much discussion about what bitcoin’s price reflects.
The value of bitcoin should, in theory, reflect investors’ belief in bitcoin as a technology. But, because of its finite supply, investors view bitcoin primarily as a commodity.
Is Bitcoin a Medium of Exchange or a Store of Value?
Initially, bitcoin was created as a medium of exchange. That is, as a currency that you use to pay for goods, like the U.S. dollar or the British pound.
Yet, over time bitcoin mutated into a store of value. People invest in bitcoin as they would invest in precious metals and stocks to protect themselves from inflation. All this while expecting monetary returns.
What Gives Bitcoin Its Value?
Bitcoin has a limited supply, which cannot be copied, is transferable, and is transportable.
First of all, its maximum supply is 21 million. Being a finite supply, it contributes greatly to the value of bitcoin. Each bitcoin is unique and scarce.
Second, no one can counterfeit a bitcoin because it runs on a blockchain. And the blockchain is an open immutable ledger. All information is validated across thousands of nodes around the world. It is virtually impossible to cheat the blockchain.
Third, it is easy to move. That is, you can send it from one account to another in a matter of minutes. You don’t have to be a computer whiz or call a financial advisor to do it.
Finally, they are extremely easy to transfer from user to user. People only need to know a person’s wallet address to make transactions.
Where Does Bitcoin’s Value Come From?
All these characteristics helped establish Bitcoin as the king of the crypto world. But where does all its value come from?
Well, just like with fiat currencies, bitcoin has value because people believe in it.
In other words, people ascribe to the potential of technology. They also have faith that one day the value of bitcoin will be higher than it is today.
This faith increases the demand for it. And by having a finite supply with rising demand, the price and value of bitcoin keep growing.
Simply put, bitcoins have value because people believe in them.