Bitcoin Is a Volatile Asset; How Is Its Price Set?

what does the value of bitcoin depend on

The first thing that comes to mind is likely the native currency you use to buy groceries. But where do they come from? Who decided that these coins, bills or numbers on your bank account app are worth anything?

In his article, Szabo reflects on how clams, shells, beads and precious metals possessed functions of money in the past. According to Szabo, these early forms of money could be called collectibles. All mentioned examples were desirable to own because wearing them increased social status: these goods were considered attractive but difficult to get, as they were all naturally scarce to a certain degree.

As a result, they became a store of value. These collectibles that were socially desirable and thus a store of value could therefore be used as a medium of exchange. Eventually, the collectables that most optimally functioned as a store of value and medium of exchange would also function as a unit of account , something that is used to express value in e.

Money can also be approached as a social institution ; a mechanism of social order that governs the behavior of individuals within a community. By using a form of money to represent value, specialization of labor became possible. Commodities like gold and silver were used to mint coins that had a certain weight, thus representing a certain amount of value. While this commodity money was more practical as a unit of account, it could also be tampered with, as coins were clipped or depreciated.

In , economist William Stanley Jevons described that as a result, representative money in the form of bank notes arose.

Under the assumption that these banks could be trusted to store the same amount as gold as was represented in certificates, representative money was a good store of value and a convenient medium of exchange, as it was easier to carry around.

In , during World War II, representatives from 44 countries agreed on a monetary system known as the Bretton Woods system. In the years shortly after World War II, this system worked well. However, due to a negative balance of payments, growing public debt due to expenses during the Vietnam War and monetary inflation by the US Federal Reserve, who started to spend more money than they carried gold in their reserves, the dollar became increasingly overvalued in the 's.

Today, just about every national currency in use is a form of fiat money. What Nixon referred to here is a macro-economic theory called Keynesian economics , that describes a set of measures for policy makers to stabilize the fluctuations in the business cycle. To limit unemployment during a recession, Keynesians think it is best for governments to lend money quantitative easing and spend it on public infrastructure. The most obvious way to create an influx of new money into the economy is to just create new money.

Only Central Banks e. Central Banks then distribute this new money to governments or to private banks that distribute it further across the economy. This influx of new money may result in inflation, since the purchasing power of the currency decreases over time as it becomes less scarce, threatening its function as a long-term store of value.

However, new money although technically; credit also starts to circulate in the economy due to fractional-reserve banking , which is the norm for most banking systems throughout the world.

Contrary to full-reserve banking, in fractional-reserve banking a bank is only obliged to hold a certain fraction of the total amount of money that they credited to lenders in their reserves. Therefore, the creation of only a small amount of new money by a central bank or amount of money added to a savings account can result in much larger amount of money being added to the circulation within an economy.

The weakness of fractional-reserve banking is that it relies heavily on the assumption that not everybody will need to access all their money at the same time, and thus trust in the system.

Once people do lose faith in the system and collectively want to withdraw more money than the bank holds in its reserve, it may collapse. This phenomenon is known as a bank run. Several bank runs occurred during and after the — financial crisis. While it is impossible to point out a single cause for this crisis, it is clear that subprime lending played a significant role in the beginning. Subprime lending means lending money to someone that may have difficulty to repay the loan in time.

During the subprime mortgage bubble , people lent money to buy houses because they speculated on its prices to increase, creating a bubble. Due to banks lending some people more money than they should to buy houses that were already overpriced, the delinquency rates rapidly increased.

To make matters worse, banks had also packaged these debts into more complex financial products e. The destabilization of the world economy then further cascaded onto the European debt crisis. Several European countries Greece, Portugal, Spain, Ireland and Cyprus were not able to refinance their governance debt or bail out over-indebted banks that were in trouble due to a bank run.

To prevent entire countries from going bankrupt, destabilizing the European Union EU , the EU and European Central Bank stepped up as a lender of last resort and unrolled multiple emergency measures. However, it also came at the cost of vastly increasing national debts. While Paul is a proponent of gold-backed currencies, he views cryptocurrencies like Bitcoin as an interesting alternative.

As the title suggests, Bitcoin was envisioned to be a form of digital money that could be sent from one person to the other without going through a financial institution. In the whitepaper, Nakamoto defined an electronic coin as a chain of digital signatures and described how it could run on a decentralized network of nodes using a consensus mechanism based on clever incentives.

Just the thought of being able to send digital money from one person to the other without mediation of a trusted third party, making it censorship-resistant, is mind-blowing by itself.

To incentivize network growth bootstrapping , initially 50 new Bitcoins were minted every time a new block was created. After every The actual circulating supply could even be considered to decrease over time deflation , as access to many Bitcoins was lost due to loss of private keys. At the time of writing, For instance, hyperinflation like the bizarre 1 million percent annual inflation rate that Venezuelans currently experience is less likely happen in Bitcoin due to its monetary policy.

The answer to that question depends on which economic theory you adopt. The classical school of economics that was dominant throughout the 18th and 19th century states that price is determined by the objective costs of production. According to neoclassical economics , which followed up on the classical school of economics and popular in the 20th century, price is determined by the equilibrium of supply and demand. When demand is high, prices rise, when demand is low, prices decline.

The Austrian school of economics, that originates in the lateth and early 20th century and saw a revival during the — financial crisis , rejects the classical and neoclassical views on price discovery. It believes that the costs of production are also determined by subjective factors based on value of alternative uses of scarce resources and that the equilibrium of demand and supply is also determined by individual preferences. The Austrian school emphasizes the importance of scarcity and the avoidance of governmental interference.

The Austrian school therefore contrasts with the current economic model that is actually based on monetary inflation and governmental regulation. Since Bitcoin shares these same characteristics, the Austrian school has become popular among Bitcoin backers and vice versa. Besides being able to retain purchasing power over time, money must be able to be reliably saved, stored and retrieved to be considered a store of value.

At the time of writing, the Bitcoin network has been online for 10 years while being functional for If user interfaces improve over time, more custodial solutions become available, liquidity improves, and the network simply abides resiliently despite attacks, its monetary evolution will gradually continue.

Bitcoin was the first cryptocurrency that drew widespread attention. Since then, many other cryptocurrencies have been created, for instance to adjust the technological or economic properties of Bitcoin or add features e. Bitcoin was the on-ramp into cryptocurrencies for most people, and is the most used base pair to be traded against. While explaining all differences between cryptocurrencies is beyond the scope of this article, two economic theories that have emerged due to the evolution of cryptocurrencies will be discussed.

The fat protocols thesis was first described by Joel Monegro in compares the value accrual of the traditional internet to that of blockchains. Nobody owns open-source internet protocols e. Google, Facebook, Amazon , helping them capture value. For blockchains the fat protocols thesis beliefs is the other way around.

Unlike traditional internet protocols, owning the native assets e. Bitcoin or Ether is necessary to use blockchain protocols. Therefore, it states adoption of blockchain protocols will increase the demand for these tokens, thus increasing their value. Successful adoption of the applications built on these protocols would automatically also increase the demand for the assets of the underlying blockchain protocol, increasing the value of the underlying protocol. The fat protocols thesis therefore states that the value accrual of the blockchain protocol will always grow faster than the combined value of the applications built on top of it.

Augur, 0x. Particularly during the bull cycle, tokens became very popular, as thousands of tokens were created and and saw enormous increases and drops in price. Value accrual in the context of the fat protocols thesis therefore particularly refers to such tokens. Simply put, this means that coins or tokens that people want to hold will accrue more value than tokens that people consider to be useless and will hastily get rid of. For instance, people may hold Bitcoin because they anticipate on it to eventually become global money.

Under that assumption, just holding Bitcoin for the long-run is logical. If many people insist on not selling their coins as a result, the available supply is low and a small increase in demand may already cause a significant uptick in its price.

Particularly tokens with only a very specific utility e. However, the notion that value is a relatively subjective feature of an asset and mostly depends on the anticipated future demand for the asset, appears to be clear. Also, the prospect of having a censorship-resistant, digital form of money with a predictable monetary inflation has enthused many as a potential alternative to the current economic system, regardless of the economic theory that one adopts.

Whether cryptocurrencies can actually evolve into an alternative form of global money that can be utilized by the general public in a way that is both convenient and secure remains to be seen. If it turns out they actually can, things might get really, really interesting. This article is also available in Russian. Undersearcher undersearcher. Tweet This. Liked this story? You can follow me on Medium and Twitter.

Disclaimer : This article was written for informational and educational purposes only and should not be treated as investment advice. Bitcoin Cryptocurrency Valuation Economy Blockchain. Continue the discussion. Cardano Foundation chairman resigns following community effort. Undersearcher Nov Undersearcher Dec Undersearcher Oct

what does the value of bitcoin depend on

As Bitcoins Price Passes $10,000, Its Rise Seems Unstoppable - A Lot Of Zeros

By using our site, yhe acknowledge that you have read and understand our Cookie PolicyPrivacy Policyand our Terms of Service. I've what does the value of bitcoin depend on looking up stuff about bitcoins for some time now and i have two question stuck in my mind:. The price is unstable because there's a fairly small free float the quantity available for buying and selling with true currencies compared to the bitoin of transactions. It's a Ponzi scheme, so demand is driven by Bitcoin marketing: it is in immediate financial interest of the holders of Bitcoin to drive up the price by "ramping" it: talking up the market price. The amount of attention that the media gives Bitcoin goes up and down - this affects demand, and that drives the price, as supply is fairly stable. The originators of Bitcoin, and the original hoarders, have most to gain: it was easiest for them to create Bitcoins.

Economics 101

As Bitcoin prices surge in the global markets, the speculation of it being a bubble has also popped up! But we are not sure if it really is a bubble but this tweet very well shows what it is. Keeping the sarcasm aside for a moment, people all around the world have started asking themselves questions. These are some hard questions that naturally arise but are often go unanswered or at best are vaguely answered. I know that measuring value in fiat is quite not right but forgive me for doing that because there is no other way as of now. Bitcoin by birth has all the properties of a sound money like gold.

what does the value of bitcoin depend on
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It is the largest holding across all ‪Solidum Capital‬ portfolios. And it's only 30% shy of its all-time high of $24.91 reached on 12 Jan 2018. It will definitely be the first crypto asset to achieve it... if we exclude stablecoins. — #binance #binanceexchange #binancecoin #binanceisglobal #binancetrader #czbinance #changpengzhao #bnb #bnbcoins #cryptocurrency #cryptotips #cryptoknowledge #cryptoexchange #cryptotrading #cryptoportfolio #solidumcapital #bullishmarket #hodl #cryptocoin #cryptotokens #cryptotrader #cryptotrade #cryptoinvestor #cryptoinvestment #financetips #financemanager #portfoliomanagement #portfoliomanager

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Why Does Cryptocurrency Price Fluctuate So Much?

Economics 101

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