How bitcoin price is determined and why it has value?

bitcoin

I had the same question as you do. How bitcoin price is determined and why it has value. So, I’ve made my research. Continue reading to find out what I’ve discovered.

The standard interpretation in all existing traditional financial markets is that price is the sole data that tells you all you need to know about a commodity, the drivers behind the stock behavior or any other existing financial instrument.

Although there are lots of disagreement on this, the fact still remains that the price drives all markets and they single-handedly determine if you make a profit or end up losing some money.

The cryptocurrency market operates in a similar way to the traditional market in this regard. More so, owing to the fact that bitcoin remains the most important cryptocurrency in the world, and all other coins are linked to it through trading pairs exchange, there tends to be a lot of focus on the price of Bitcoin.

In time past, bitcoin prices have dictated the situation of the whole market but still, very few people have a sound idea of how Bitcoin price is determined.

How Bitcoin Price Is Determined

The price of bitcoin is not set by anybody in particular rather by the market. The more complex side of bitcoin pricing is its variation. For example, the price of Bitcoin if checked on google will differ from that of some crypto trading website.

Additionally, these cryptocurrency websites don’t have a universal price. However, one of the major reasons responsible for these variations is where the Bitcoin data comes from.

Bitcoin is never traded in one place, it is traded on a number of exchanges, all of which set their own average prices, based on the trades being made by the exchange at that time.

Therefore, if you want to buy and sell bitcoin, it is necessary to choose a particular exchange that will have its average price that suits your budget at that particular time as the price of bitcoin continually fluctuates.

 A number of factors determine the price of Bitcoin, they include:

Supply and Demand

Supply and Demand remain the most important determinant of cryptocurrency prices. It operates with a basic economic principle that if a cryptocurrency has a high token supply with little demand from traders, then the cryptocurrency’s value will drop.

However, if the supply of a particular cryptocurrency is limited and the demand is high, then the value of the coin will increase. In the bitcoin world, supply does not interpret the amount of accessible, but rather the amount of bitcoin available at a given price.

Demand, on the other hand, means the number of bitcoins people are willing to buy at a given price. For instance, if a total of 1000 Bitcoin are up for sale and the lowest price is 400 BTC for 8,000 USD each.

This is the lowest selling price. Also,  a total of 1000 bitcoins are to be bought and the highest bidding price bid is 8,000 each for 300 BTC. So, the prices are 100 BTC for the price of 8000 USD each and there are still 600 BTC left that can be sold at any convenient higher price.

Over time, there exists a bid for 50 BTC but the highest bid remains at 7950 each. The midpoint of the selling price and the highest biding price determine the price of bitcoin.

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This means in that illustration, the price of bitcoin is expected to hover around 7975 USD. These day to day transactions determines the market pride of bitcoin.

One of the major things to note about bitcoin is its volatility. The price of bitcoin is never constant, it can drop about 15% in a matter of minutes and increase up to 200% in a few weeks.

No country asides Venezuela holds bitcoin or any other digital asset as a legal tender. Therefore, predicting the future price of bitcoin is almost impossible, there is room for guesses, there are lots of technical analysis too, but no one can categorically determine the price of bitcoin beforehand, it is all just speculations.

In mathematical terms, the price of a bitcoin or any other cryptocurrency is determined by using this formula:

Price of a single bitcoin = Total Market Cap / Total supply of bitcoin

Network effect

This describes the process where a number of new participants improve the value of a good or service.

A good example of this is the internet. The use and scope of functionality of the internet only increased as more people started using it.

Now the internet is as important to us as any other basic needs. In the same vein, more people discovering bitcoin’s beauty and starting to trade in its network increases the value of the coin because as more people realize its usefulness, it creates a demand for it and increases the price of one unit of bitcoin.

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Forks

Forks are changes in bitcoin protocols that are not compatible with the older versions. This means all peers must upgrade to continue participating and completing their transactions.

In this case, those who didn’t upgrade would be separated from the network and won’t be allowed to make new transactions. This births division in the blockchain, they can however simultaneously exist.

The community is divided over the best way possible to increase the number of transactions. Changes in protocols that result in new crypto are hard forks while those that do not birth new crypto are soft forks. In this case, those with parent cryptocurrency end up having the same amount of newer ones.

The situation causes panic and the reaction of the market can not be predicted as it is worsened by people who have a large amount of cryptocurrency and dealers who deal in large volumes.

These two groups, use their skill to acquire as much cryptocurrency as possible when they find out a fork is going to happen. This causes inflation in the price of digital currencies and when the price is high, coins are sold to any exchange available at that moment.

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Why does bitcoin have value

Bitcoin has value due to the same reason paper and digital cash possess value. This is because it is a handy form of money commonly accepted by people to make payments, transfer value and even buy and sell things. Unlike fiat currencies that gain their value through structures put in place by central banks and the government, bitcoin’s value comes from its code, scarcity and its distinct mode of operation.

Scarcity

Bitcoin’s natures have introduced digital scarcity, unlike fiat currencies that have the tendencies of being inflated without end. Also, there exists a cap to the number of BTC which is set at 21 million. It is important to note that anything that has any value should have scarcity and utility.

Additionally, there are some bitcoin that has been lost due to inappropriate address during transactions, loss of wallet keys which means there would be fewer bitcoins available with time.

Utility

The utility of Bitcoin lies in its decentralized nature because not a single person can oversee the network operations, unlike centralized systems. It can also be used for any kind of transaction as a lot of transactions have been completed using bitcoin.

Store of value and stability

Although price stability is still a feature that is lacking in bitcoin because of its volatility, it still possesses the ability to store value due to its commodity-like nature. However, that is likely to change as bitcoin gains more adoption.

I hope you understand now how bitcoin price is determined and why it has value. If so, then I appreciate if you share this blog post to your social channels.

Featured Image by MichaelWuensch from Pixabay

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