The last decade has been very positive for bitcoins in terms of mass awareness and growth. Although the mass adoption did not happen at the rate at which it was being expected but still, the development of blockchain based solutions has come at a steady pace and bitcoin has been at the helm of it, as it was the first crypto currency that started it all.
Interest in bitcoins is increasing fast due to the bull run in the markets. Bitcoins are at present trading at approximately $11700, due to the daily volatility the price may go up and down but this is the general level around which bitcoins are hovering these days and there is a very high possibility that this value may continue to rise because as more interest is generated in bitcoins, more people will demand bitcoins and this demand is going to drive the value of bitcoins further upwards.
In order to understand how bitcoins draw their value we must first understand what bitcoins re and how do they function.
What Is Bitcoin?
Bitcoins are a crypto currency, based on the block chain platform. Blockchain is simply a network of computers connected together forming a system that can verify data and store it. Blockchain allows creation of crypto currencies and other blockchain based products.
Blockchain allows the creation of an alternate financial system that targets the drawbacks of the conventional financial system. Blockchain for instance removes the need for financial intermediaries like banks. It cuts down transaction costs and allows access to funds globally. On top of this, perhaps most importantly since blockchain is a network of computers maintained by users across the world, it cannot be controlled by any monetary authority. So bitcoins for instance cannot be issued by the government, neither can the supply of bitcoins be regulated by the government. This makes bitcoins unique because governments cannot control it. it is virtually impossible to hack blockchain and the transactions are irreversible, which adds to the security protocols.
There are many other crypto currencies but bitcoin is the oldest and most well known crypto currency, it is perhaps the face of blockchain.
What Makes Bitcoin Valuable?
If you look at money, it is infinite because governments can print as much money as they want. The Covid-19 response by many governments has seen over $10 trillion pumped into the global economy and all of this has been newly created money. When you pump so much money into the market, you will eventually end up reducing the demand for money.
When you look at bitcoins, you can see that they are finite in supply. Bitcoins are produced whenever a block of data is added to the blockchain but over time, the reward for adding blocks will continue to half till it becomes impossible to add more bitcoins. So in the future, bitcoins will be limited in supply and this means that their value, in the future when their supply becomes finite, is going to shoot.
The market value of bitcoin is determined by the forces of demand and supply. Unlike fiat currencies, bitcoin does not have any centralized figure. The value of bitcoin changes instantaneously after each transaction. Furthermore since there is no central fixed value for bitcoins, each crypto currency exchange can therefore set their own rate with their own profit margin. This is why the rates of bitcoins differ from one crypto exchange to another and this also creates an opportunity for arbitrage.
The Change In The Value Of Bitcoin Over The Years
Ever since 2008, bitcoins have gone through a lot of ups and downs, for the first few years the value of bitcoins didn’t really change much. Bitcoins were being hailed as an innovative new technology but mass adoption was just not happening.
It was around 2017 that the value of bitcoins began to spike suddenly. This was due to a number of factors. Firstly the mining technology had progressed leaps and bounds and by 2017 mining farms were beginning to mine bitcoins and this was bringing in heavy players in the market.
Bitcoins were no longer being mined by enthusiastic individuals in their homes using high end graphic cards, no instead mining farms were being set up all over the world. This not only made mining more difficult for the small players but the influx of big players meant that more investment was coming in to improve the mining technology.
This increased interest resulted in an increase in demand which led to an increase in the price of bitcoins almost to the $20,000 per BTC mark. This was however a bubble that many experts were predicting. The bubble burst soon in 2018 and bitcoins crashed. The crash however didn’t end the run for bitcoins.
Some short sighted experts thought that the crash meant the end of bitcoins, it was being considered as the failure of a new technology to stack up against investment options such as stocks and bonds. However bitcoin soon stabilized around the $9000 mark and this stability resulted in an increased interest.
The Future Of Bitcoin Innovation
Industry experts and investors now realized that bitcoin was not only fulfilling the purpose of medium of exchange but it was also acting as a store of value. It could be used by investors to park their investments for both the long and the short terms. In the short term the investors can benefit from the volatility of the coin and in the long term investors could benefit from the mean reversion. This is exactly how investors treat stocks.
However the volatility of bitcoin is far greater than stocks and so is its potential to give profit over the short term. In addition to this the introduction of new blockchain based solutions such as security tokens and DeFi products are increasing interest in bitcoins, which has caused the value of bitcoins to rise up once again over $11000 mark. Investors right now feel confident while investing in bitcoin because it managed to survive the March 2020 crash, that affected every asset class. The manner in which bitcoin recovered after the crash, has restored the confidence of investors into bitcoins and therefore the value of bitcoins is expected to rise further in the days to come.
