5. Bitcoin… from where does it get its value?
As we’ve already explained Bitcoin is a distributed financial system, created in 2009 by a programmer, or group of programmers, under the pseudonym of Satoshi Nakamoto. Bitcoin is powerful and a masterpiece of engineering, but how much is a bitcoin worth? Why does its price go up and down so many times a day? Who determines the price?
If you had bought 200 € of bitcoins in January 2010 and sold in November 2013, you would have had 240,000,000 €. From 200 € to 240 €million … multimillionaire in 3 years with an investment of laughter.
How is the price of Bitcoin determined for such situations to occur?
Supply and demand in bitcoin
The law of supply and demand mentions:
“The point that exists between the demand and supply of some material good is always going to find a balance in the market …”
The value of the asset is increased by the excess of demand and the scarce supply, that is to say; many people buying and few people selling in the market.
With the same principle as a balance, if one is more consistent than the other, then the equilibrium point will readjust, fall or increase according to supply and demand. If there is more supply than demand, the break-even point will decrease, if there is more demand than supply, the break-even point will increase.
When a product has a high value, it is usually because the traders, place a high price, taking into account what the product is all about.
Many times, you may have heard that the demand exceeds the offer in cryptocurrencies, and you may be wondering … what does that mean?
We are going to use the example of a tangible asset, such as potatoes, we must take the principle that it does not perish, and that it can be maintained unlimitedly, such as cryptocurrencies. Today an article appears in the newspaper; in which it is established that potatoes can be used in the future as a means to cure hitherto unattainable diseases.
Then, people will buy large quantities of potatoes, because the current price is low and they know or think that if this project comes to an end, then the potatoes will cost much more. Then they can resell them when the prices have increased,
This is commonly called speculation. Betting on the fluctuation of an asset in the market for a financial transaction that aims to achieve a profit.
Brief Price history
Among the factors that may have contributed to its price increase, we can mention the European sovereign debt crisis between 2012–2013, as well as the growing interest of the media and the Internet.
As the market capitalization of the total stock of bitcoins approached 1 billion$, some investors indicated that bitcoin was in bubble prices.
At the beginning of April 2013, the price per bitcoin fell from 266$ to around 50$ and then rose to around 100$. For two weeks at the end of June 2013 the price fell consistently to 70$.
Afterwards, the price began to recover, reaching once again on October 1 the 140 dollars. On October 2, the FBI closed Silk Road, which caused a quick fall to 110$.
The price recovered quickly, returning to 200$ several weeks later. The next upward climb climbed to the bitcoin of 200$ on November 3 to 900$ at the end of November.
The price of a bitcoin exceeded 1000$ by the end of 2013 on Mt. Gox.
Prices fell to around 400$ in April 2014, before the rally in the middle of the year. Next, they declined to not much more than 200$ at the beginning of 2015.
In the second quarter of 2017, prices skyrocketed from 1200 to over 1,900$ and continued to rise. At the end of 2017 the price of Bitcoin reached 19,000$ due to the boom that occurred in the public media and at the moment is currently in consolidation around 9,000$.
Reasons why bitcoin could be better than FIAT
- Crypto gives power back to individuals and takes it away from the banks.
- Easier to move crypto currency as opposed to with money paper.
- Crypto is harder to lose than fiat currency (if you are careful).
- The absence of commissions and expenses of any kind in the payments with Bitcoins (besides the fee for the miners), makes us realize that the traditional financial system bleeds our finances.
- No falsification, to date nobody has falsified a bitcoin … although if you could handle a 51% attack, you could THEORICALLY, falsify bitcoins.
- The acceptance of bitcoins is a benefit for companies because it eliminates the fraudulent problems of credit cards. There are no chargebacks! Not to mention the relatively low rates.
- Users can access bitcoin without any bank account. That means that the billions of unbanked people around the world could access Bitcoin.
- Bitcoin appreciation exceeds dollar inflation.
Also, one thing worth mentioning and that a lot of people doesn’t seem or want to notice, is that FIAT is not backed by anything other than the faith of the people who accept it as payment and of other people who agree in turn to accept it as payment from them. The main difference is that, for the moment at least, the illusion, in the case of FIAT, is more widely and more fiercely believed.
Halving
Halving is an event programmed in the Bitcoin protocol that halves the reward that miners receive for adding a new block to the main chain. This occurs every 210,000 mine blocks (approximately every four years)
Remember that according to the paper published by Satoshi Nakamoto, the total number of bitcoins to circulate will be 21 million.
However, today there are some 17 million bitcoins in circulation. Where is the difference? This difference between the existing bitcoins and the total amount to exist is due to the bitcoins appearing in each new block of the chain of blocks (blockchain in English).
Nowadays, adding a new block to the blockchain has two objectives:
1. Process pending transactions and collect fees.
2. Get an extra reward.
In the economical aspect,
In a centralized economy, the central bank has the responsibility to create money at a rate commensurate with the amount of goods and services exchanged by citizens. This would establish that the trade is carried out with stable prices.
However, this really does not happen due to bad banking and governmental practices that end up altering the economy. This is one of the reasons why the global economy suffers from inflation and constant debt, devaluing countries’ currencies and causing social crises.
Bitcoin is designed to have programmed currency issuance and decrease over time, and that is why the miners’ reward cut is applied. This has a positive impact on the economic ecosystem because, with fewer and fewer currencies in circulation and greater demand, the value of Bitcoin tends to increase over time.
In the technological aspect,
Halving certainly has a first-hand impact on bitcoin mining. By halving the reward for mine blocks, the profitability to maintain the equipment will be affected immediately due to the fall in revenue.
Some claim that the miners themselves have been raising the price for months so that at the time of halving the price is sufficiently balanced so as not to close or destroy old equipment. Others are betting on a drop in the price so that some mining pools (groups of miners) fall and those that have endured the most persist.
Obviously, nobody knows the future, but one thing is clear, and that’s that every 10 minutes there will be 12.5 bitcoins less to be created in the world, so over time the shortage will increase (only if the increase in demand is greater than the increase of supply). If in addition the demand is also increased, the prices will tend to rise.
How does the demand for Bitcoin affect national currencies?
The cryptocurrencies are being accepted in most countries of the world, the implementation of this currency has as a side effect the devaluation of the national currency, therefore, users often use Bitcoin more frequently to make purchases and make payments.
The fact of using the Bitcoins to make purchases, pay for services and other interactions will result in the excess of fiat money in the streets of the cities, as there will be is a large amount of paper money in the street, thus FIAT should lose the value it has in the market.
Do you think that a system capable of managing global economic accounting in a more optimal, transparent, decentralized and cheap way than the traditional one, and that gains millions of users every year, will disappear? And if it does not disappear, how far do you think the price of a single bitcoin will go?
