Many factors determine what gives bitcoin its value, including supply and demand, availability on exchange, competition and internal governance.
How much are bitcoins worth? One bitcoin is equivalent to more than rupees 10 lakh 38 000. When it was launched in 2009, a bitcoin was only worth 6 pese. Bitcoin prices have absolutely shattered any estimates that were made during its launch. Over 10 years ago, bitcoin was the world’s first decentralized cryptocurrency since its launch. Bitcoin’s prices have gone both through the roof and hit rock bottom multiple times to understand what leads to the rise and fall of its prices. It is important to understand what bitcoins are and how they work.
1. What is bitcoin?
Bitcoin is a digital currency that emerged after the United States housing market bubble burst in 2008. Its creator, an anonymous person or a group of people, goes by the name of Satoshi Nakamoto. Unlike usual government issued currencies, bitcoin is not operated by a centralized authority. Bitcoins are not available in physical form – a running tally is kept on a public ledger or blockchain that can be assessed by all users. Transparency is a critical part of bitcoin’s working. So each and every transaction is verified through a huge amount of computing power. It offers the promise of lower transaction fees than traditional online payment mechanisms. After its launch, bitcoin gained so much popularity that it triggered the launch of hundreds of virtual currencies that are collectively called altcoins.
2. How do bitcoins work?
A bitcoin user does not need to understand how the cryptocurrency works to invest money in it. However the technology behind it called blockchain is being adopted by many fintech companies. The entire bitcoin network relies on a shared public ledger. This ledger is called blockchain.
All confirmed transactions made with bitcoins are included in the blockchain. This leisure allows bitcoin wallets to calculate their spendable balance and ensures that bitcoin is actually owned by the spender. Cryptography is used to ensure integrity and chronology of records on the blockchain when transactions are made between bitcoin wallets.
A secret piece of data called a private key or seed is used to sign transactions. This private key is the proof that transactions have been made by the owner of the wallet. This signature prevents the transaction from being altered by anybody after it has been issued.
All transactions are broadcast to the network and are confirmed through a process called mining. It is a distributed census system that is leveraged to confirm pending transactions by including them in the blockchain. Mining enforces chronology and protects neutrality of the network. The transaction must be packed in a block for strict cryptographic rules to be verified by the network. Mining prevents anybody from replacing parts of the blockchain to roll back their own spends on bitcoin prices.
3. How much is bitcoin worth?
Setting the price of a bitcoin depends on the supply and demand. When demand for bitcoin increases, its prices also increase. And when the demand falls, the prices fall too. There is a cap on the number of bitcoins that can be circulated. Only 21 million bitcoins will ever be created. This won’t limit the currency as transactions can be denominated in smaller subunits or for bitcoin such as bits one bitcoin contains a billion bits. Bitcoins are further denominated into smaller units if there is a need for it or new bitcoins can be mined up to the limit if the existing bitcoins are exhausted.
Prices of bitcoins are very volatile. On january 1st 2020, a single bitcoin’s value was nine sixty five dollars which dropped to four thousand nine hundred and sixteen dollars. On march eleventh, twenty the same price shot to thirteen thousand eight fifty one dollars for one bitcoin. On november 3rd 2020, so should you invest in bitcoin, some early adopters of bitcoin made remarkable returns on their investment.
It is similar to how early investors on a brilliant startup end up making a fortune. When the company turns into a unicorn. But not every startup turns into a success and not every investment in bitcoin will give you astonishing returns. Bitcoin prices are volatile as the currency is traded in a fairly small market and is vulnerable to price manipulation. However stability comes when its size grows and more and more people join the network.
At present, bitcoin is performing well as a set but this spike in its price has come after a three-year downturn an investment made. On december 17 2017, for one forty 19140 is still a big loss at thirteen thousand eight fifty one dollars. Any investment made in bitcoin should be made after calculating the estimated risk and gains involved in such an asset class.
4. What determines the price of 1 bitcoin?
Some of the factors that affect the price of bitcoin and why the price changes?
4.1. Supply and demand
The supply and demand of bitcoin plays a big factor in the prices. Currently, there is supposedly a cap of 21 million bitcoins. When that cap is reached, bitcoin mining will no longer create new bitcoins. The supply of bitcoin reached 16.8 million in January of 2017. Meaning that around 80 percent of the total amount of bitcoin has already been mined and made available to the public. As we all know in general economics, the price goes up when the demand cannot keep up with the supply.
4.2. Availability on exchanges
Many crypto platforms allow investors to buy and sell bitcoin through connecting buyers and sellers in their in-house marketplace. Networks are created through these kinds of marketplaces as the exchanges become more popular. This is because it becomes easier to gain more participants.
The price is affected by this, as it has a direct effect on the popularity of bitcoin as more people buy and sell. By general rule, the more popular Bitcoin becomes, the higher the demand. And as we said earlier, there is a finite amount of bitcoin. So the supply stays the same, while the demand grows higher.
Although it is believed that bitcoin is the most popular cryptocurrency, there are over 1,000 cryptocurrencies in circulation. Examples of other cryptocurrencies are litecoin and ethereum. The presence of competition keeps the value of an investment in check. For example, the value of the US dollar would have been different if stronger currencies didn’t exist such as the Euro, the Yen, or the Pound.
4.4. Internal governance
Since bitcoin is not regulated by a single authority, miners are put on the spot to process transactions and secure the blockchain. If they want to tweak or change the software, then it has to be the decision of the consensus. Because of this, members of the bitcoin community feel that solving fundamental issues can sometimes take too long, particularly the issue of scalability.
At this moment, the bitcoin software is only able to process about 3 transactions per second, which is incredibly slow for how popular it is. As of now, the community is trying to figure out ways to speed up the number of transactions. Sometimes, when these changes are applied, they turn into a whole other cryptocurrency.
Examples of this are bitcoin cash and bitcoin gold Investors then sometimes decide that the new currency isn’t as valuable, resulting in the new currencies not having enough value as bitcoin.