Crypto Basics: Why Is Bitcoin Worth So Much?
Despite doubts by financial experts worldwide, Bitcoin surpassed people’s expectations. Today, it is one of the most expensive digital assets, and in 2021, the cryptocurrency reached its all-time high – the Bitcoin price peaked at $68,789.63.
Everyone wants to own a bit of Bitcoin, and it’s no wonder – the asset takes up 15% of the overall crypto market cap. But how does cryptocurrency gain value, and why is Bitcoin worth so much? You’re one of many to ask this question. So strap in! It’s time to get into the nitty gritty world of Bitcoin’s pricing.
Where It All Began
Before being able to explain how the cryptocurrency value is formed, it’s crucial to grasp why any currency has worth throughout history. For a medium of exchange to have value, it needs a few components to work. These characteristics are resistance to forgery, acceptance, scarcity, mobility, popularity, and demand.
Before fiat currency, gold was the money of the past; if you think about it, it had all the above features. It withheld its value over time. It was scarce yet widespread, precious, desirable and easy to transport. And just like Bitcoin mining, extracting gold takes a lot of power.
Moreover, there was a demand for it. As you can probably tell, all of these features also apply to Bitcoin’s worth and other cryptocurrency values. Let’s take a closer look at the formative qualities that make up crypto’s worth.
We already understand how gold, a physical commodity, was valuable once upon a time. But how does this apply to a digital asset? We’ll explore the different conditions that make crypto a valuable asset today:
- Consumer Demand: As more people understand crypto’s potential, they want to own it. The rising interest in cryptocurrency tokens results in the increase of bitcoin prices. This supply and demand connection is crucial to its value.
- Limited Supply Mechanism: The Bitcoin blockchain has a limited circulating supply of 21 million coins. Just like gold, this limitation increases its value. There are no supply increases. Therefore, people will demand from a limited source.
- Adoption: If a crypto token or coin has applications in the real world, for example, in healthcare, there will be an increased demand for it, which can boost its value.
- Speculation: Value rise is also aided by speculative trading, in which investors purchase crypto to later sell it for a profit. These are the so-called “hodlers.”
- Market Sentiment: Confidence and trust in blockchain technology can boost its reputation and attract more investors.
- Institutional Investment: When institutional investors spend resources like computing power to mine cryptocurrency or spend significant capital on crypto, they drive up its price.
With these factors in mind, you can now begin to answer, “How does cryptocurrency gain value.”
Bitcoin’s Most Revolutionary Quality
Aside from these six qualities, we believe there is one extremely important feature that makes Bitcoin so desirable.
The key difference between fiat currencies and cryptocurrency is the lack of backing by governments or any central authority. Instead, Bitcoin has its own public blockchain network (Bitcoin Network), which enables you to send and receive value to anyone worldwide. All you need for these crypto transactions is just a computer and Wi-Fi.
Additionally, because crypto isn’t governed by a bank or other institutions, it completely removes third parties from its processes. This is its main appeal – Bitcoin and other crypto networks belong to the public and are available to anyone. It’s very similar to cash, except that you can only hand out cash man-to-man. You can’t hand it to your child studying in China, for instance.
I can already hear you say, “That’s not true. I can use Western Union to send my kid money.” While that’s possible, it means you would go through a private company or another third party to complete this transaction.
Instantly, you would have to pay transaction fees just to send your money. You also might need to open a bank account, and your child will pay more fees for its upkeep. Should you open accounts in different banks, you will have to pay more fees to send money from one to the other.
If you were to use the Bitcoin Network to send your money instead, you can easily do it for free. Furthermore, it wouldn’t matter where you are based, what your credit score is, or what nationality you are.
Overall, many supporters of Bitcoin believe that digital assets can put control in the hands of the public, as opposed to private businesses. Blockchain resists manipulation and censorship due to its decentralised nature.
Why Bitcoin Prices Fluctuate
As you likely already know, crypto prices tend to swing and are notorious for their instability. Aside from wondering “how does cryptocurrency gain value,” we also need to consider how it can lose value. It’s not all bad. Price swings are normal for crypto assets. It is due to these volatilities that crypto can be such a good investment, as it can enable traders to earn from its rises.
In order to understand why Bitcoin is worth so much (or so little, depending on when you are looking at its value), we need to grasp the factors that affect crypto price swings.
The King Coin’s price can be swayed either in red or green by the following:
- News, buzz, and media coverage;
- Laws that limit or broaden its sale and use;
- Other competing cryptos and their popularity;
- The cost of Bitcoin’s energy consumption;
- Major financial transactions by whales in the market.
Let’s say some wealthy cryptocurrency holders, such as the Tesla CEO Elon Musk, decide to sell a big portion of their crypto funds. Other investors notice this and begin to lose trust in the coin. Why?
Well, this can create a lot of speculation – questions like, “Why did he do it?” may emerge alongside worry and lack of trust in the cryptocurrency market. The media begins to reflect on these worries, spreading the news, and as a result, other investors start to question if they can experience cryptocurrency gains at all. Demand declines, and the price of the asset drops.
Of course, it could have been that Elon Musk simply had another reason for selling his assets. That’s why it’s important for investors to resist FUD (short for fear, uncertainty, and doubt).
Additionally, bad laws and costly expenses can also make investors question their crypto investment, which can once again affect its worth.
The alternative events can have the opposite effect, of course. They can work as a benefit for Bitcoin. That’s why it is extremely important for traders to pay attention to market trends and research their investments well before selling their assets.
How To Invest in Bitcoin
And speaking of investments, if you want to join the bandwagon and invest in crypto, you can do so right now. There are numerous cryptocurrency exchanges and brokerages available online. For example, well-known publishers like Outlook and Yahoo recommend brokers like Immediate Connect Club.
With the help of this useful website, you can pair with a skilled broker who can give you access to trading tools and educational materials. Moreover, your broker can help you monitor Bitcoin’s price and design portfolio strategies based on knowledgeable analysis.
We specifically like Immediate Granimator’s broker partners for the features they offer their clients. You can enjoy demo trading and practice your strategies to gain confidence. Or set up an auto trader who can help you chase your goals whenever you can’t be in front of the computer. It’s a win-win, and you can even register for free.
The Bottom Line
By now, you should be able to confidently answer, How does cryptocurrency gain value? It’s a combination of a few factors, including supply and demand, adoption, scarcity, market sentiment, and speculation. As a crypto investor, it’s important to understand this so you can grasp the power of DeFi and its effect on traditional finance.