By Sterling Xie. Edited by Swastik Patel
Cryptocurrency seems to be such a foreign concept—assets that you can’t see or touch. Bitcoin is known to increase or decrease 5-10% (if not more) in value every day. However, cryptocurrency and bitcoin’s value mirror the stock market and follow a logical pattern. In this article, we will discuss the value of bitcoin and the factors that impact it.
Supply and Demand
Just like most commodities, Bitcoin and cryptocurrency is valued based on supply and demand. This means that if the demand for the cryptocurrency increases faster than the supply, the price goes up. In the case of Bitcoin specifically, supply is created through a process called “block mining,” where Bitcoin miners mine new blocks on the blockchain, creating new outlets for transactions. However, we know that there is a fixed maximum supply of Bitcoin at 21 million Bitcoin. For example, in early 2021, there was a huge outburst in the publicity of Bitcoin and the demand far outpaced supply. Bitcoin prices skyrocketed.
Mining for cryptocurrency and Bitcoin essentially means using a computer to verify the next block in a blockchain. This network of miners allows the blockchain to be extended at the cost of their computer’s computing power. The blockchain will essentially run from power generated through these computers. In return, miners receive cryptocurrency and cryptocurrency tokens. Thus, if mining costs increase, the Bitcoin price must also increase since miners will not mine if they do not make a profit from it.
Bitcoin uses a proof-of-work system, meaning miners compete with each other to solve complex math equations in order to create new blocks. As such, this requires more computing power and therefore more expenses, making Bitcoin one of the more valuable cryptocurrencies.
Prices are also highly dependent on competition. As competition in the blockchain market increases, there is a higher likelihood that more efficient or more productive cryptocurrencies will outcompete others. Therefore, this would increase demand for the better cryptocurrency and decrease the prices of others. Nearly all of cryptocurrency is valued on the ability for the blockchain to expand its network. Bitcoin mining currently is one of the most efficient and productive systems in the market, and therefore, Bitcoin is one of the most stable and valuable cryptocurrencies.
While cryptocurrency volatility is a huge concern for investors because of its decentralized nature, it is important to recognize how cryptocurrency prices actually change. In the near future, Bitcoin and cryptocurrency prices will likely stabilize as more users expand the blockchain network, making them a more viable investment opportunity.