Factors that Determine the value of Bitcoin

[TL; DR]

Bitcoin does not have intrinsic value.

User trust, decentralization, security, utility and scarcity are some of the factors that determine the value of Bitcoin.

The greater fool theory says that market bubbles influence the value of cryptocurrencies like Bitcoin.

According to monetarist theory , velocity and supply of Bitcoin determine the value of Bitcoin.

Newcomers to the crypto sector have difficulty in understanding the determinants of the value of cryptocurrencies. This is because there is no government or a single authority that controls Bitcoin.

On the contrary, a decentralized network of thousands of computers or nodes approves transactions on the Bitcoin blockchain. Just like most fiat money, Bitcoin has nothing that backs it.

Part of the puzzle is the fact that if a person buys Bitcoin, he/she does not acquire anything tangible but the ability to receive, store and send it. Also, a person who holds a cryptocurrency does not own any component of the blockchain.

Does BTC has intrinsic value

Intrinsic value means the true worth or value of an asset. For example, people use crude oil to produce plastics, fuel and other materials. Since we can easily quantify the goods created from the crude oil, we conclude that it has intrinsic value.

In terms of investment assets, the intrinsic value of stock is the investor’s equity in a company that produces goods and services. However, fiat money has no intrinsic value. Likewise, Bitcoin has no intrinsic value. In this respect fiat money and Bitcoin are similar.

Source: Theconversation

What determines the value of Bitcoin?

Bitcoin derives its value from its attributes which include decentralization, scarcity, trust, security and distribution, among others.

Trust

The trust that people have in fiat money and Bitcoin is the source of their value. For instance, people trust Bitcoin because they can use it to purchase some goods and services. More importantly, they can invest in it and get high returns, in most cases.

However, Bitcoin users do not put their trust in certain entities or individuals to benefit from BTC. In reality, Satoshi Nakamoto, the creator of Bitcoin, intended to make BTC an alternative to fiat currency, yet keep it independent from any external control. All its functionalities are based on a smart contract resulting in immutable transactions.

Utility

Bitcoin has utility because it has different functions in the global economic ecosystem. For instance, it is a very convenient way of sending funds around the world. This is because sending BTC is fast and costs less than fiat money. For example, an individual can send $60 000 worth of Bitcoin for a fee of around $50.00.

Decentralization

Bitcoin users control BTC through a large network of users. In other words, there is no single entity, individual or government that manages BTC. Even more, there are no intermediaries when carrying out Bitcoin transactions since it depends on a peer-to-peer mechanism. Interestingly, anyone can participate in improving the Bitcoin network because it is open source in nature.

Distribution

In this sense, distribution means that many people are able to participate in the Bitcoin ecosystem. They can do this through their nodes which verify transactions to avoid double spending. A large network of nodes also increases the security of the Bitcoin network. As such, anyone, anywhere around the world can participate in the Bitcoin economy as long as he/she has the required equipment such as computers.

Security

The Bitcoin blockchain is very secure due to its rigorous transaction validation process. As long as the user follows the security checks and uses the right tools such as digital wallet their BTC is secure. The reason is that the Bitcoin blockchain does not have incidents of security breaches.

Popular theories why Bitcoin has value

We have looked at several characteristics of Bitcoin that enhance its value. In addition to these, there are theories that explain the determinants of BTC value.