Bitcoin (BTC) is a digital currency created by the pseudonymous Satoshi Nakamoto. It is an alternative to central bank-controlled fiat money. But what gives Bitcoin its value? The simple answer is supply and demand. Like any other form of currency, the price goes up when more people want to buy BTC than sell them. And the price goes down when more people want to sell BTC than buy them.
But, more factors determine the value of Bitcoins. This post discusses what makes BTC valuable and what lies ahead for digital currency.
Why do traditional currencies have value?
Currency has worth because it can serve as a store of value and a medium of exchange. Traditional currencies also exhibit six crucial characteristics that enable easy economic use: scarcity, divisibility, acceptability, portability, durability, and counterfeit resistance.
Currency is helpful since it acts as a store of value or if it consistently maintains its relative worth through time. Many cultures throughout history employed commodities or precious metals as payment systems because they had a stable value.
Today, many currencies are fiat. The government issues these. No commodity is backing them. Instead, fiat currency is backed by ‘individuals and governments’ trust that others would accept it.
Can Bitcoin be used as a currency?
Bitcoin displays characteristics of typical fiat currency: scarcity, divisibility, mobility, fungibility, and acceptability. BTC has certain qualities of a store of value with current currencies such as the US dollar.
Like traditional currencies, BTC is convenient to use and people widely accept it. BTC is used to transfer money and to buy and sell items. However, unlike US dollars, BTC’s value is determined by its code, infrastructure, scarcity, and acceptance rather than by the government.
What determines BTC value?
Simply put, Bitcoin has value because people believe BTC will one day be worth more than it is now. The speculation boosts its demand, and the price continues to rise.
Other factors are:
- Limited supply: BTC’s maximum supply is 21 million. According to many analysts, the restricted supply, or scarcity, contributes significantly to BTC’s value.
- Portable: BTC is a very transportable currency. It is easy to transfer from one exchange account or digital wallet to another.
- Fungibility: Every BTC is worth the same as its counterpart, regardless of who owns it or its history. Meaning one BTC will always be a value symbol interchangeable with another.
- Divisibility: You can split 1 BTC into 100000000 Satoshis.
- Durability: You can use a BTC or Satoshi indefinitely without degradation.
- Acceptability: Many retailers and users are recognizing and accepting BTC.
Furthermore, Bitcoin is decentralized. No single authority oversees Bitcoin. Unlike traditional money, no one can censor, control, or manipulate the network or its transactions, making it impossible for anyone to seize your money.
Why did Bitcoin’s value increase?
Bitcoin has piqued the interest of individual and institutional investors recently. In addition, media coverage, investment “experts,” and business owners have promoted Bitcoin. These factors have driven the Bitcoin price. Digital currency has also become popular in countries with significant inflation and depreciated currencies, such as Venezuela, Argentina, and Turkey. Unfortunately, Bitcoin has also become popular among individuals involved in money laundering and other illicit practices.
In a nutshell, a limited future supply has been combined with an increase in demand to increase the BTC price. However, the price continues to vary in alternating cycles of growth and decline.
If the BTC price rises over time, consumers with a fraction of a BTC will still be able to deal with the cryptocurrency. The creation of side channels, like the Lightning Network, may increase the value of the Bitcoin economy.
Does interest rate affect Bitcoin’s value?
“Rising interest rates will be a headwind for crypto assets in the future,” said Caleb Tucker, director of the portfolio strategy at Merit Financial Advisors in Atlanta.
Indeed, like other risky assets, Bitcoin’s price fell after the Fed’s decision to hike interest rates in November 2021.
Aggressive rate rises are not good for crypto prices, and analysts believe the volatility will continue in the short term.
Since the beginning of 2022, risky assets such as stocks and cryptocurrency have been highly connected. Both have been moving in lockstep this year, with investors fleeing in reaction to increasing interest rates, growing inflation, and the possibility of a recession. If the stock market falls as a result of another rate rise, the crypto market would most certainly fall as well – and vice versa.
Conclusion
So what does the future hold for Bitcoin? Well, that largely depends on public opinion and regulatory decisions. If you think about it, those two factors have always been the driving force behind any asset’s value – whether fiat currency or cryptocurrency. What do you think will be Bitcoin’s price in 2025?