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Since bitcoin is a new revolutionary type of currency, like any other currency or unit of account, it only has value because people think it has value. Some currencies are backed by gold or other precious metals while others are backed by people’s perception.
Cryptocurrencies were designed as a decentralized unit of exchange whose price fluctuates based on market metric.
The value of bitcoin can be said to be derived from different factors. It is fast, borderless and decentralized with the potential to change the financial world for better.
Not only does it currently have value as a payment system, but also as an asset class (a store of wealth). From research, bitcoin accrue it value because it is built on open protocols, meaning, anyone can innovate on top of it and make the system better.
Bitcoin also has undeniable utility even when compared to other, newer cryptocurrencies.
What is a currency?
There is simply no other altcoin that is as widely used and integrated at this point in time. Through network effects, we’re starting to see exponential growth, which creates value as more and more people start using Bitcoin and more merchants accepting it as a means of payment.
Another important means through which bitcoin got it value is through trading.
Since it is now accepted in some countries as a legal tender, it is traded by merchants in an attempt to earn profits. This has drastically increased it value as people are leaving other forms of trading to trade bitcoin and other altcoins since they are decentralized, fast and can’t be traced among other factors.
Today, there are already thousands of merchants around the world accepting Bitcoin as a means of payment, thus proving the growing value of it.
Determining value: Bitcoin vs Gold
When the first telephone came out, it had very little value in that hardly anyone used it yet. However, as more and more people started using the telephone, the usefulness grew exponentially.
The same is true for Bitcoin, the more people use and understand it, the more useful it will become and the more value it acquires.
It is important to note that the price of Bitcoin is not the same as its value. Value determines price and not otherwise. It value is determined by the intersection of it demand and supply.
Simply put the market in which it trades.
To better understand this, everyone agrees that the price of a product being at zero dollars does not mean it has a zero dollar value. Just like the law of demand and supply, the more the demand, the higher it price and vice versa.
That being said, it is the ongoing interaction between buyers and sellers trading with each other that determine the specific price of Bitcoin.
With this, one must consider the amount that buyers are currently willing to pay for the future value of a specific item.
In other words, if the market believes the price of Bitcoin will increase in the future, they are more likely to pay more for it now and this is one of the reason why it value is rising.
Also, unlike fiat money that is produced, governed and controlled by a central authority (central banks), there is a cap set on total bitcoins. This cap is also part of what gives bitcoin it value as it reduce how much the cryptocurrency can devalue through inflation.
Finally, the following features are the main driver of the value of bitcoin and other altcoins like Ethereum, Litecoin, Ripple etc.
but not limited to them;
- Limited Supply and supply/demand
- Energy put into mining to produce and secure the blockchain
- Blockchain difficulty level
- The utility of the currency, and how easy it is to use and store
- Perceptions on its value by the public
- Price of Bitcoin
- Market cap