With value being the worthiness of something, the answer to what determines Bitcoin value is rather simple. It lies in basic economics; supply, demand, utility, and scarcity. So basically if an item is both scarce and has utility (usefulness), then it must have some value.
For example, if you consider gold, its value comes from the fact that it’s rare, difficult to find and its supply is limited (scarcity). Gold also has usefulness from which consumers derive satisfaction from (utility). Combination of these factors creates its value from which its price is determined based on market demand and supply.
The Bitcoin design
To understand the Bitcoin value, first of all, we need to understand its composition. Bitcoin was created by an anonymous person(s) known as Satoshi Nakamoto. Its code is open source and therefore its public. There is no single individual that owns or controls the currency.
A network of nodes verifies its transactions through cryptography. Then they are recorded on a public distributed ledger which is known as the blockchain.
Nakamoto designed bitcoin to be scarce
Bitcoin was designed to have a limited supply. Only 21 million coins will ever exist which is good for the Bitcoin value. Users create coins through a process known as mining.
Mining is a process where transactions are verified and added on the blockchain. Therefore, anyone with internet connection can participate in this activity. The process involves compiling recent transactions into blocks by solving computationally tricky puzzles.
The first participant to solve the puzzle gets to add the next block on the blockchain and claim the rewards.
The rewards act as an incentive for users to mine. They are in the form of transaction fees and newly released bitcoins.
It’s how new bitcoins enter the network – through block rewards. Nakamoto designed the block reward to half after every 210,000 blocks which is roughly every four years. Therefore, what initially started as a reward of 50 BTC, dropped to 25 BTC and it’s currently at 12.5 BTC. The prize will keep diminishing until all the 21 million coins have been released.
Mining of the last block will happen in the year 2140 completing the 21 million coins.
What makes bitcoin useful?
The Bitcoin value benefits from many use cases. First of all, it gives users control over their finances, and this offers them freedom in payment. A person using bitcoin can send and receive money from anywhere in the world at any given time.
This helps eliminate the various limitations that affect transferring money today when using traditional institutions.
Also, payments made in BTC can be finalized without one having to reveal their personal information. Consequently, it helps protect against identity theft.
Bitcoin also has meager transaction fees. It’s something that makes the currency a better option when making payments when compared to the fees charged by PayPal and credit cards.
Another factor that is good for the Bitcoin value is its usage as a mode of payment. BTC presents fewer risks for merchants because bitcoin transactions cannot be reversed hence reducing the risk of fraud.
Factors that will aid Bitcoin value in the future
So far, bitcoin and the other cryptocurrencies suffer from lack of mass awareness as few people understand them. However, this situation is likely to change as more people are educated about cryptocurrencies and the advantages they offer.
Also, as regulation of the crypto market steps up, we are likely to see more stability from bitcoin and other cryptocurrencies. Currently, crypto coins are highly volatile because of various reasons that regulation will help combat.
In conclusion, regulation will play a key role in mass adoption. It will make it ok for people and also institutions to get involved with cryptocurrencies. When this happens, we can expect Bitcoin value to rise.