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Description: Few people today doubt that you can make money on cryptocurrency. But still, there is a question: "What makes bitcoin so valuable, and how is its price determined?" Some experts call cryptocurrencies the money of the future, but there are many opinions that Bitcoin is nothing more than a bubble. In this article, we will figure out what is behind the cost of cryptocurrencies.
Bitcoin is one of the most expensive things on today’s market. Despite it being just a line of computer code, we, traders, investors, and usual people, value it for some reason. After the latest China crackdown, when Bitcoin’s price decreased by 6%, we started to value it even more. But what makes Bitcoin so important for the industry? Today, we will try to answer this question, and find out what Bitcoin worth is, and what measures the value of Bitcoin.
As you know, Bitcoin operates beyond any government’s power. It means that its price and value are determined not by the gold standard like national currencies, but by something else. It is also not tied to the state economy and has no physical form, so its price cannot be affected in a physical way, only digital one. Here are some factors that influence the price of Bitcoin:
Demand on the market;
The total supply of the coin;
The amount of coins still possible to mine;
The amount of energy required to mine the coin.
The first two points are the major ones. As with usual money, the demand/supply ratio helps to understand what happens on the market and determine today’s or future price of the cryptocurrency.
Cryptocurrency and fiat money may seem to be similar, at least for some people. However, they are different in many ways. Let’s go through the main points:
Physical vs virtual form. Fiat money has a physical form (coins or paper), and we can touch, use, and move it whenever we need to. Cryptocurrencies, on the other hand, are digital and can be accessed online only;
Confidentiality. Using national currency, especially during online shopping, doesn’t guarantee any confidentiality. Banks still overlook every transaction and can present it to the government agencies if such a need arises. Cryptocurrency transactions are usually untraceable. Depending on a service, a trader can buy or sell coins, and nobody will ever find out about it;
Regulations. Fiat money is fully under governmental control. It depends on regulations and changes in state policy. Cryptocurrencies operate on their own (except for El Salvador that has recently legally adopted Bitcoin);
Volatility. Truth be told, cryptocurrencies are pretty volatile. The price of Bitcoin can easily change by 5-10%, up or down, during 24 hours. Considering the price of one coin, it is quite a number. Fiat money, on the other hand, is more stable and regulated by the government.
When we invest in something, we always assess if it is a good idea or not. As for Bitcoin, many are wondering if it is going to lose its value one day. We can make some predictions using today's facts and numbers.
The probability of Bitcoin becoming worthless is low. Check the main factors that contribute to its price fluctuations:
Uneven turnover. Remember, around 40% of all Bitcoins are owned by just 1.000 people known as whales. They can manipulate the price of the currency;
Media influence. Social media is a powerful tool when it comes to promoting some ideas or trends. It can make Bitcoin skyrocket and vice versa;
Insufficient liquidity. As Bitcoin is not adopted worldwide, it is hard to convert it to cash whenever and wherever one wants.
It is realistic to expect Bitcoin’s collapse. How can this happen, and what may cause it?
One of the main reasons can be Bitcoin’s complete ban in numerous countries. We have already seen the consequences of this when China banned crypto mining.
The second big reason is a loss of trust of traders and investors. Many say that Bitcoin is just a big financial bubble. Still, it depends on what backs up Bitcoin. The answer is – investments. So, if no investments come, or trading stops, so does the existence of this cryptocurrency.
Now, to cover everything mentioned above, here are some key points for you to keep in mind:
The price of Bitcoin is not created by governments but by the members of the market;
It depends on the demand and supply, as well as the energy it requires to mine, and the number of coins available;
Cryptocurrencies may seem similar to usual fiat money. But, in reality, they are different in many ways;
The possibility of Bitcoin losing its value is small. Still, it is better not to exclude this option from a list of possibilities.
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