Bitcoin’s price has made momentous gains over the past two years, which has driven intense media speculation and hype that has done much to create an air of mystery and suspense around digital currencies. Those who have made the decision to buy Bitcoin years ago might well have become millionaires in little to no time, and new projects and initiatives have been quick to ride on the coat-tails of the world’s foremost cryptocurrency
But where does Bitcoin’s value come from?
Bitcoin’s recent price surges might create the impression that cryptocurrencies are a vacuum where new money is seemingly “created” out of thin air, and investors can “get rich quick” by investing minimal sums into Bitcoin and see large returns – leading many to scratch their heads and ask ‘how much is a Bitcoin worth?’
Investors and pundits have similarly pondered the same question – and, simply put, there may be no reliable value we can pinpoint.
Bitcoin’s nature as a peer-to-peer currency network that has its foundation in cryptography traditionally classes it as a speculative investment. Bitcoin has enormous potential to serve as a decentralized global network through which parties can transact and settle payments in an average of less than fifteen minutes. The fact that Bitcoin foregoes the influence of governments or central banks means that it is not necessarily subject to the same political or environmental pressures that might determine the value of fiat currencies or precious metals such as gold.
Bitcoin’s value is determined by the investment and use of its community and is officiated by the distribution of new Bitcoins into the market through the process of mining.
Generally speaking, value is chiefly created by the ability of any currency to act as three things; a store of value, means of exchange, and unit of account. In other words, if people around the world simply stopped using the US Dollar tomorrow and deemed it worthless, we would see the value of that currency plummet because no party would want to own, trade with, nor issue it.
As Bitcoin’s price as both soared and plummeted in the recent past, media around the world have tuned in to explore Bitcoin’s peaks and valleys – the cryptocurrency’s novelty, interesting technological foundation, and the willingness of investors to purchase the cryptocurrency has in the past created what can be called a publicity-price loop. This means that as Bitcoin becomes more ‘public’ (or more accepted) we can expect to see the value of the cryptocurrency increase over time.
Bitcoin’s value will ultimately be determined by its use. Since 2009, Bitcoin has seemingly established itself as a form of ‘digital gold’ where investors can purchase shares (Bitcoins) and expect to sell them later for profit once their respective value has risen.
As a peer-to-peer currency network, however, Bitcoin could stand to benefit most when used as a conventional currency to purchase either goods or services. Accordingly, the biggest determining factors of Bitcoin’s worth in the near future will be the willingness of parties to accept the cryptocurrency as tender, and the willingness of institutions, central banks, and governments to either invest in it or accept the use of it.