More and more people become interested in bitcoin investment. However, they are still wary of this cryptocurrency system due to lack of understanding about its value. Just like conventional money, the value fluctuates from time to time. What determines Bitcoin value? There are seven factors that determine the value of Bitcoin.
1. Supply and Demand
The first two factors to be discussed are the supply and demand of Bitcoin. As we know in the basics of economics, value is driven by the dynamics between the two. High value is marked by a supply that is lower than the demand. The public is aware that the number of Bitcoins produced is capped at 21 million.
For the moment, the number has not reached that cap. The system also employs a limit of how many coins can be produced per year. Because of that, as the years go by, the supply for Bitcoin keeps reducing. Production has also become more challenging. On the other hand, the demand for Bitcoin is steadily increasing.
Because Bitcoin garners interest from the public, many people are looking forward to investing in it. Some countries have even accepted the cryptocurrency as a legitimate currency. Gradually there will be a large increase of demand for Bitcoin among people as many countries start to adopt this currency.
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2. Production Cost
When you are asking “what determines Bitcoin value?” Its production cost also plays a significant role. The production of every coin is done through mining. In order to mine Bitcoin, you have to prepare the necessary hardware and software. It takes a considerable amount of electricity to conduct the process, and the result may not be satisfactory.
Per 2021, the cost of mining Bitcoin varies from $7,000 to $11,000. This cost might differ depending on the electricity cost in the area. It takes around 10 minutes to produce a single coin, but the process is getting more difficult as the time goes by because the competition is getting tight.
Many people are wary about Bitcoin because there are times when the production cost is higher than its value. This situation has happened in 2015, 2018, and 2020. Of course, such a situation makes people wonder whether it is a worthy investment. It also calls for infrastructure development to make production more efficient.
Competition is another answer to what determines Bitcoin value. Bitcoin is not the only cryptocurrency system in the world, despite being the most established one. As for now, it still has the highest number of users. However, it is expected that the popularity will wane over time as more systems are introduced.
Currently, the biggest competitors for Bitcoin are:
- - Ethereum
- - Solana
- - Tether
- - USDCoin
Nonetheless, since Bitcoin has been established first, experts believe that it still has a strong competitive value. Being a pioneer means that people will trust this system compared to others. Investors are then willing to make investment in the ecosystem, which stabilizes its market value.
This notion is backed up by many proofs. The price of Bitcoin remains stable because of its established ecosystem. Oftentimes, people even see price increases in their investments. Thus, it is suggested that people who want to dabble in cryptocurrency to include Bitcoin in their portfolio and may add other cryptocurrencies for diversification.
Bitcoin was released after a financial crisis that changed some regulations in the economic system. Because of this, the regulation around this currency product is very lax. Even today, there is very little control over the Bitcoin ecosystem. It causes transactions to be free of all the complicated rules.
Of course, there are two sides to this situation. On one hand, the lack of regulation provides several benefits. The most prominent benefit is easier transactions across borders. As we know, conducting transactions across countries is difficult. Bitcoin and other cryptocurrencies make the process more seamless and affordable.
However, many people also expect governments to start monitoring Bitcoin and other cryptocurrency closely. Tighter regulation in cryptocurrency is expected to provide the following benefits:
- - Better stability in the Bitcoin and other cryptocurrency markets.
- - Investors will be putting in their money with more confidence due to better protection.
- - Lower rate of frauds or scams for Bitcoin consumers around the globe.
- - Prevent illegal practices like money laundering that are at times done under the guise of crypto trading.
At the end of the day, the main objective is to maintain the ecosystem in the long run, so that it will not collapse only after a few years of operation. Formulating the regulation is not easy because there is no precedent case. The technology of cryptocurrency is still new and people have yet to see its potentials, and dangers.
5. Media and Community
The last two factors to discuss in the quest of answering what determines Bitcoin value are media and community. Media plays a significant role in disseminating the elusive cryptocurrency to the public. People who do not understand and feel wary about Bitcoin turn to the media to give them answers to their questions.
Media has a responsibility to educate the public about Bitcoin and other crypto products. When there are new findings about Bitcoin, the media must deliver the information quickly to the public. In this case, the media must be able to translate the complicated concept into something that common people can understand easily.
The Bitcoin community is also responsible in spreading information about this cryptocurrency to others. The community consists of users, tech developers, and financial institutions. When public awareness of Bitcoin is widespread, the trust will grow and more people will start participating in the ecosystem.
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At the moment, most financial advisors will provide a strong warning if you want to invest in Bitcoin. Because of the aforementioned factors, the price of Bitcoin can be very volatile. You will see significant price increase and decrease in a short amount of time. Because of that, portfolio diversification is highly recommended.
However, that should not hinder you from joining this venture. You must fully understand first what determines Bitcoin value. This knowledge can be a parameter to measure your capacity to invest. Starting small is the best thing that you can do to thrive as a Bitcoin investor.