What Determines Bitcoin’s Price?
One of the key statements about Bitcoin is that it is a global virtual currency which can be traded everywhere in the world. Following this line of thought, it could be used as the universal paying method, because it doesn’t acknowledge any customs barriers or government restrictions. Thus, as any other currency, Bitcoin has a value. But what determines its price?
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In theory, the price of an asset is settled taking in account several forces that act upon it. Why should I buy this item? What drives me into that direction? What guarantee do I have? How do I foresee the future and how does this asset help me to achieve my goals? In this article, we’ll look at some features that help us to answer such questions.
- Scarcity (Supply): Bitcoin can’t be minted carelessly. There is a restriction on its code that states that only 21 million bitcoins will ever be released. That’s it. No more. No less. What does it mean? It means that there is no chance to mint more money to supply a future demand. If the demand of an item is greater than the supply, the price of that item increases.
- Demand: As stated in the previous paragraph, if you have a great demand, the price surges. But what can trigger a greater demand for Bitcoin?
- Further commercial acceptance: If more and more businesses start to accept Bitcoin as payment, it’s more likely that more people will use it. Why? When a business uses other payment methods, like a Credit Card POS, they pay a fee to the company that provides this service. This fee, in most cases, is aggregated in the item price. When you use Bitcoin to pay for this item, in theory, it can be bought at a cheaper price because there is no fee attached.
- Killer app: For the previous item to happen, it is necessary that business owners accept the Bitcoin concept, and understand how the system works. That is a barrier. If an app could build a bridge between the Bitcoin network and the current financial payment system, these businesses could accept Bitcoin without even knowing. This could also increase the demand for the currency itself.
- Security: Your money, in your hands. You don’t need to rely on financial institutions that can lose or steal your money, and also could get away from oppressive laws that limit your investment or free choices. All this is appealing to individuals that live in countries which are problematic in the financial/economic field, such as China, Iran or even Venezuela and Argentina. When an asset is considered more secure, it is more trusted, which helps to increase its value.
When Bitcoin is a plausible answer for the questions mentioned in this article, the perceived value of it increases. When Bitcoin fails to answer one or several of these questions, its price falls, and the market begins to wonder how stable and secure it is. When the Bitcoin community gives examples of maturity and growth, it helps to build a more concrete vision, one that the world can understand.
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