How is the Value of Bitcoin Determined?

“What determines bitcoin’s price?

“The price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls. There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn’t take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile.”

Bitcoin vs Traditional Finance

Bitcoin isn’t regulated or backed by any government or central bank, so its price isn’t based on the same metrics as fiat currency. Inflation, economics and monetary policies don’t affect price the same way they do with the US dollar or Euro. And Bitcoin isn’t a corporation, so it doesn’t act like a stock or bond.

Mainstream Adoption

However, as governments try to put more checks, balances and regulations on Bitcoin, thereby classifying it as a commodity, its value rises and volatility lessens. And as blockchain technology is used for more and more applications, prompting more people to get involved with cryptocurrency and mainstream acceptance to increase, the perceived value — and hence the price — increases again.

Competition

As a more complicated part of supply and demand, Bitcoin’s price can be affected by competition — namely, all the altcoins that keep cropping up through initial coin offerings (ICOs), DeFi projects and more. If another virtual currency gains popularity, like Ethereum during the DeFi boom, that will negatively impact the price of a bitcoin and cause it to decrease.

Cost of Production

While a real-world cost to create a virtual currency might not be immediately apparent, it actually costs quite a bit to make bitcoin — to the point where individual miners find it hard to make a profit anymore. The mining rigs (super-fast computers with top-of-the-line graphics cards) are very expensive, and the electricity costs to run these machines are huge. When production costs go up, so does the price of Bitcoin.

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