Reading the Value of Bitcoin, One Unit at a Time
Bitcoin is the brainchild of Satoshi Nakamoto who brought it to life back in 2009. Nobody is sure if Mr Nakamoto actually exists of if his name harbours the identity of a single person or a group. Bitcoin has been a revolutionary way of settling payments. The entire network is involved in carrying out single operations and the only ‘ownership’ anyone involve may have is the generous consensus that a transaction has occurred.
With this in mind, we ought to ask ourselves – what exactly determines the price of a single bitcoin? Purchasing a bitcoin is not the same as purchasing a bond or exchange one FIAT currency for another. The results remain for the most part invisible. There is no way to prove that an individual has actually carried out the transaction. All you can see is that the public ledger has registered this exchange.
Since Bitcoin is not issued by a central bank, it would be difficult to pinpoint its price and forecast how this may evolve over time. There is a simple reason for this. While most real-world cryptocurrencies are dependent on multiple factors, including monetary policy, inflation rates, and economic forecasts, Bitcoin operates on its own terms and conditions. Let us look at what the current criteria for determining the price of a single bitcoin are:
- Supply and Demand – Basically, how many people are willing to buy Bitcoin at any given time;
- Competitors – The number of cryptocurrencies who are claiming investors from Bitcoin and undermining its supremacy;
- Exchanges – The companies that are willing to trade in Bitcoin, from the basic ones to the more sophisticated services that swap cryptocurrencies into FIAT ones and vice versa;
- Regulators – How much the government is concerned with your digital riches and what restrictions there are;
Supply and Demand
Cryptocurrencies are unlike FIAT currencies. For the most part, a government can partly control the supply and demand of a given cryptocurrency through its exchanges. However, the intractability of Bitcoin and its brethren has made it difficult to have a clear idea of what the current demand is. With regards to the supply, it is true that it has taken a heavy toll on everything from searching for extra-terrestrial life to the electricity grid.
By 2020, crypto mining will require as much electricity as Denmark produces for its needs every year!
Here are other consideration to take into account when discussing the total supply and demand of Bitcoin.
- There is an actual limit to how many Bitcoin can be in circulation. Currently, their number is capped at 21 million. In layman’s terms, the longer Bitcoin is around the more coins will be hewn out of the digital nether, which will in turn drive up the demand. However, with literally every second, Bitcoin is becoming more exclusive (acquiring one on your own is a tall order). Interestingly enough, its price is not necessarily pegged to limitations in the supply.
- After the 21 million ceiling has been reached, the price and demand for Bitcoin will be based on practical matters. Simply said, the market will determine if you can actually put your Bitcoin to good use, then the value, and subsequently the demand for Bitcoin will be better.
How do competitors fare?
Even though Bitcoin reigns supreme over its competitors, there are multiple contenders for the title of the second-hottest crypto asset out there. Dogecoin, for example, has started as a joke, but it is now pushing ahead to new summits of the crypto world.
Nobody really knows how many contenders to Bitcoin are out there until an Initial Coin Offering (ICO) is announced. By dint of an ICO, everyone involved can get an estimate of which coins are now trending.
Cryptocurrencies may not have genuine exchanges, but they have their own specific marketplaces where you can trade all cryptocurrencies for real-world ones. In addition, regulations will have an increasing role in how future cryptocurrencies’ prices are determined.
Despite these real-world implications, cryptocurrencies prices are surprisingly volatile. In the wake of the hacking spree that took place in East Asia, people would have expected Bitcoin to collapse, but the crypto asset took modest hits after which it buoyed right back up.
Governments and Cryptocurrencies
Turkey and Venezuela have both joined the cryptocurrency fray. It is understandable why cryptocurrencies will appeal to governments. However, Venezuela is an ailing dictatorship whereas Turkey’s President Recep Tayyip Erdogan may be caught in a series of scandals which he had swiftly snuffed out through the state control army, police and media. Even though government involvement in cryptocurrencies is a good sign for the industry as a whole, we should still learn to differentiate between those advancing in the trade with ill intentions. The future will prove interesting for both national cryptocurrencies. And the question remains – could cryptocurrencies really supplant national ones?