What Determines the Value of a Bitcoin?
Although it has been more than a decade since the inception of bitcoin, many people still struggle to grasp the concept. One of the most frequently asked questions is what determines the value of a bitcoin. It seems unorthodox that something on your computer can be used in trades.
Even though the concept is received as something baffling, the idea of a cryptocurrency is not much different than usual currency. Take a moment and think about how does a simple $100 paper note carries value. If you understand the concept of currency, then cryptocurrency is just a digital alternate, with a much higher value than general currencies.
Virtual currency has been around since before bitcoin surfaced. It is all your debit and credit cards and all your online transaction mediums. However, virtual currency represents our regular currencies in a digital medium. Bitcoin, on the other hand, is a currency in itself, it does not have any physical representation, yet it has value. It does not rely on any of the physical mediums. Its value is not representative of gold or silver. Rather complex mathematical algorithms are what it relies on. As long as humans accept it as a mode of transaction in trade, it has a material value. For more information you can visit the trading app bitqt.
Demand and Supply
A process called bitcoin mining is a process that involves complicated mathematical problems that can only be solved using high-powered ASIC processor computers. These computers consume a lot of electricity in order to run efficiently. Each mathematical problem solved adds a block to a blockchain, which is the goal of the whole process. In return, the miner receives a certain amount of bitcoins that they can use for trade purposes. This is also the source of supply for these bitcoins.
Over time, the rate at which these new blocks were being added to the blockchain has reduced. With large corporations endorsing bitcoins, this slow rate of supply means that it becomes difficult to cater to the demand. In turn, the value of the bitcoin increases. It is a sort of inflation, and it can even be artificially induced by reducing the reward that a miner receives when they successfully add a block.
This artificial inflation has been at play for quite some time. The reward when the bitcoins were first introduced was 50 bitcoins per block. However, over the period of three years, as it gained some traction, the reward was halved. Later, as the demand increased and people became more interested in mining, this reward value was halved again. Since then, the value has been reduced significantly, and as of January 2021, a miner gets rewarded 6.25 bitcoins for every block they mine.
The demand and supply phenomenon is what impacts the most when it comes to determining the value of a bitcoin. Other factors may include competition with other cryptocurrencies, how practical it is to use, and whether it is actively used in trade, etc. However, since the last bitcoin is not predicted to be mined anytime soon, demand and supply will keep playing an important role in its value.
Even though, today, as bitcoin has crossed the value of $56,000, it seems as if this currency is invincible, that is not the case. Even bitcoin can have a technological failure that may turn it upside down. However, the probabilities of that happening are very low, and the current trends show that the value is bound to increase over the period of time. Since its inception, it went through a lot of bumps, but the overall increase in the value has remained constant. And the answer is the increasing demand and keen management of the supply.