The value of a currency gets defined by its physical attributes and the velocity in the economy. It shows their function as a unit of exchange to store some value. Like any other fiat currency, bitcoin also demonstrates some attributes of a currency, which becomes the primary source of its value in the market.
Whether you want to buy bitcoin for investment or for the sake of simply owning some form of digital currency, knowing about the value will help you to assess your asset’s worth.
Today we shall explore why Bitcoin is considered valuable in detail.
Valuation of Bitcoin is challenging
Bitcoin’s value lies in its restricted supply and growing demand in the highly volatile market. However, the market price fluctuations are real, we can witness a rebound in oversold markets and a cool-off in overbought markets, making it very difficult to comment on Bitcoin’s valuation at any instance. Another problem with Bitcoin’s valuation is that Bitcoin’s function as value storage through a medium of exchange is still not clearly defined.
Bitcoin is valuable – Here is why
Experts speculate if the price of one bitcoin cross $514K, Bitcoin’s market capitalization would go to roughly 15% of the global currency market. With such potential, Bitcoin can undoubtedly be a promising investment for a lot of people. Here are some factors that determine Bitcoin’s value.
#1. Scarcity of Coins:
Because of this rarity, Bitcoin can keep its value in a higher position. The demand for cryptocurrencies has risen while the supply has shrunk.
Investors are yearning for a piece of the profit pie that arises from trading its finite supply, which is growing even larger. Similar to gold, the use of which is restricted to industrial and commercial purposes, bitcoin has limited utility. Blockchain, the technology that powers bitcoin, is being tested and used as a payment mechanism. Remittances across borders are one of its most efficient use cases for accelerating speed and reducing costs.
Some nations, like El Salvador, are placing their bets on Bitcoin’s ability to advance to the point where it may be utilized as a medium for regular transactions.
#2. Utility of Bitcoin:
The magnitude of the Bitcoin network, however, makes double spending uncommon. It would be essential to launch a 51 percent attack, in which several miners hypothetically control more than half of the network’s power. This bunch might dominate the rest of the network to manipulate records by holding the majority of network power. A massive amount of time, resources, and processing power are a requirement to launch such an attack against Bitcoin, making it exceedingly implausible. Fiat currencies are far less divisible than bitcoin. Up to eight decimal places can be used to split up a bitcoin into its component satoshis.
For practical use, the majority of fiat currencies can only be divided into two decimal places. Users will still be able to conduct transactions using bitcoin even if the price of the cryptocurrency keeps increasing over time.
The creation of side channels like the Lightning Network may increase the economy’s worth even more.
#3. Economists’ views
The flow of money, its velocity, and the worth of the products generated in an economy are used by free marketeers to attempt to value bitcoin in the same way they would value money.
The simplest method to go about it would be to estimate the value of Bitcoin’s projected proportion by first examining the present global worth of all forms of payment and all other repositories of value that are comparable to Bitcoin. Government-subsidized money is the most common form of exchange, thus we shall only include it in our model.
#4. The marginal cost of production
In a market, when producers of the same good compete with one another, the selling price of that product should converge to its marginal cost of production. According to empirical data, the cost of producing a bitcoin tends to influence its price. According to a different perspective, Bitcoin does have intrinsic value based on the marginal cost of creating one unit. The amount of electricity required for bitcoin mining results in a substantial expense for miners.
Final thoughts
Bitcoin exhibits money-like features, which has convinced monetarists and regulators to keep a close eye on Bitcoin. As a few transactions take place in the Bitcoin network and the denominations are also low, it acts as money. While trading happens in larger volumes, commercial activity is still relatively diminutive in comparison.