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What Is A Bitcoin Worth?

Updated on April 14, 2015

Economics Of Bitcoin

Like other currencies, the values of crypto currencies are also subject to market conditions. A number of factors come in to play while determining the valuation of a crypto currency. The value of a Bitcoin is determined by its supply and demand. If the demand for Bitcoin exceeds its rate of supply, the price increases and if the supply exceeds more than the demand, the price falls. Now only limited amount of Bitcoins are in circulation among users and further currency creation is algorithmically controlled, predicted, and maintained at a decreasing rate. This allows the demand of the currency to grow significantly larger than its supply, leading to a stable price. As the currency is relatively new technology and very less markets have adopted it over the period, the volatility of the market is exceedingly high, leading to drastic fluctuation of prices from time to time.

Bitcoin As Fiat Money

Along with the above description, it is safe to say that Bitcoin is Fiat money, just like the US dollar. Often currencies are associated with the gold standard but in 1971, the US government detached itself and now the dollar price is determined by people’s perception about it. Therefore, like gold or any other precious metal, the US dollar has no intrinsic value. People who think it is valuable determine its price. Bitcoin follows the same principle. If you think that Bitcoin is valuable, it is valuable, else it is just a piece of code. In case of the US dollar, people trust the US government to control and determine the price of the currency but in case of crypto currencies, people trust the technology, code and acceptance of other users to determine the price of the currency.

An Example Please

A simple example would clearly explain the value determination process. Whenever you buy gold or any other precious metal, the price that you pay is determined by the gold standard and demand of gold in the world. But when you exchange your currency for US dollars, the US government and people who consider the dollar as a valuable currency determine the price. Therefore people determine the exchange rate for US dollars depending on the wide acceptance of the currency. Even though the currency is not associated with any standard.

Similarly when you buy a Bitcoin, the price is determined by the people’s demand. Whenever there is a fatal economic problem in the society, the price of US dollar goes down, because people think that the currency has lost its value and may cease to exist in the near future leading to a financial breakdown of the west. Similarly when there is a problem with the technology or theft of Bitcoin, people think that the Bitcoin may cease to exist. Therefore, they do not want it anymore. They start selling off the currencies they already have but people who buy them want at lesser prices, fearing its demise. Thus the price goes down as its demand is reduced.


Bitcoin Price History

Does The Price Ever Rise Again?

Once the currency stabilizes i.e. when people start thinking that the value of Bitcoin is rising and it has a huge upside potential, they start buying it in huge amounts. Other users who already own Bitcoins now want to sell at higher prices to curb the growing demand. This raises the price of the currency leading to its increased worth. Lately, a Japanese Bitcoin exchange by the name Mt. Gox that was one of the top Bitcoin exchanges in the world, filed for bankruptcy following the theft of Bitcoins worth billions. This led to a decreased interest in Bitcoins among users fearing losses. Therefore the price of Bitcoins fell drastically. Now with wide acceptance of the currency and renewed interest of the users, the prices are rising again. But still it would take significant time for users to again trust the technology and viability of the currency to start investing in it.

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