Bitcoin Price : How it is Determined?

(Last Updated On: December 17, 2017)

Why Bitcoin has Value?

Bitcoin price is increasing day by day. But why some things digital has value? Bitcoin has the characteristics of money based on the properties of mathematics rather than relying on physical properties (like gold and silver) or trust in central authorities (like fiat currencies). Every form of money, from dollars to gold to bitcoins, is only valuable if people consider it to be valuable. A money’s worth is completely based on our own individual perceptions. If we trust and value a form of money, we’ll accept it in return for our own goods and labor. But our trust in particular forms of money is not arbitrary or without reason.

Bitcoin has nearly all of the properties of secure, sound, and useful money (durability, portability, fungibility, scarcity, divisibility, and recognizability). And if a new form of money possesses enough of these qualities, especially to the point where it’s advantageous to use over other existing forms of money, people will voluntarily choose to accept it as payment and hold it as store of value. As demand increases, value increases, and the exchange rate goes up.

In short, Bitcoin is backed by mathematics. With these attributes, all that is required for a form of money to hold value is trust and adoption. In the case of Bitcoin, this can be measured by its growing base of users, merchants, and startups. As with all currency, bitcoin’s value comes only and directly from people willing to accept them as payment.

Current Bitcoin Price



What determines Bitcoin’s price?

When bitcoins were first created in 2009, they didn’t really have any perceived value. Tens of bitcoins would have been worth the same as a bunch of pennies. Every single bitcoin that exists was created to reward a bitcoin miner. Besides the big payout when they add a new block of transactions, miners are also essentially tipped a very small amount for each transaction they add to the ledger. It’s also worth nothing that every 210,000 blocks, the number of coins generated when a new block is added goes down by half. So what started as areward of 50 bitcoins descreased to 25, then 12 and a half. It’ll only be around 6 bitcoins in a couple more years, and keeping decreasing. Eventually, there will be so many transactions in a block, that it’ll still be worthwhile for miners to mostly be paid in tips. According to current projections, the last bitcoin – probably around the 21 millionth coin – will be mined in the year 2140. This decreasing number of bitcoins is actually modeled of the rate at which things like gold are dug out of the earth. And the idea is that keeping the suppy of bitcoins limited will raise their value over time.

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.

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