13.01.2023

Blog: What is behind the value of bitcoin?

Blog: What is behind the value of bitcoin?

Bitcoin is the world’s most popular cryptocurrency, and its price has risen remarkably high in recent years. Many have undoubtedly wondered what factors make up the value of bitcoin in the end. This text aims to reveal the factors behind the value of bitcoin.

              
Bitcoin’s operating principles behind its value

One of the key factors behind the value of bitcoin is the unchanged operating principles programmed in the bitcoin protocol. The most important of these is that the maximum number of bitcoins is 21 million, and that the bitcoin halving happens every four years (210,000 blocks). With the halving of bitcoin, the mining fee paid to the operators of the bitcoin blockchain, i.e., the miners, will be reduced by half for each new block in the bitcoin blockchain. Currently, in the bitcoin blockchain, a new block is mined every 10 minutes, and the mining fee paid for each new block is 6.25 BTC. The built-in halving of bitcoin prevents inflation and keeps the amount of bitcoin on the market stable.

Bitcoin is the world’s largest distributed peer-to-peer network, and any single entity can`t influence its operations. The maximum number of bitcoins is completely quarried, and there is no single entity behind bitcoin that, like the central banks, would create an endless amount of bitcoin in the markets.

In addition to Bitcoin’s unchanged monetary policy, bitcoin’s scarce supply also contributes to the value of bitcoin. Bitcoin’s maximum amount is 21 million, and the block rewards, which will be halved every four years in the future, will ensure that bitcoin’s scarcity and, consequently, inflation will fall further. Bitcoin is already a much second scarcer investment target than gold, and this gap will only increase in the future with bitcoin halvings. The scarcity of bitcoin is one of the main factors behind the value of bitcoin.

Bitcoin’s unchanging operating principles and the unique technology behind bitcoin are the key pillars of bitcoin’s value. One of the most important factors behind the value of bitcoin is also the security that bitcoin brings with it. Bitcoin’s extremely decentralized network and the blockchain technology underlying bitcoin are the foundation of bitcoin’s security. Anyone can join the bitcoin network administrator and contribute to the network’s decentralization. Bitcoin also does not have central servers or centralized databases, which would create vulnerabilities in bitcoin’s network. Indeed, the Bitcoin network can be seen to be entirely immune to traditional threats such as hacking.

Bitcoin as an enabler

Thanks to Bitcoin’s unique technology, Bitcoin offers people something the traditional financial sector has not provided. Bitcoin allows every people to be their own bank. People can also be confident that inflation will not eat up the value of bitcoin holdings.

A functioning monetary system is not a matter of course. There are several countries in the world where the purchasing power of the local currency is declining at a tremendous rate. Lebanon and Venezuela, for example, have long been known to struggle with high inflation rates. Recently, worrying news has also spread from Turkey, where reckless monetary policy has succeeded in collapsing the exchange rate of the Turkish lira. The monetary system in the West is often taken for granted, but this isn´t the case all over the world. One of the most significant factors behind the value of bitcoin is how Bitcoin can bring about a positive change in the daily lives of billions of people.

There are more than 1.7 billion people in the world without a bank account. However, most of these people have smartphones and access to the internet. Bitcoin gives people living without a bank account access to the global monetary system. Indeed, for the first time, numerous people can save their wealth in a safe place and send money in the blink of an eye at a low cost.

El Salvador, the first country in the world to make bitcoin its official currency, is an excellent example of a country where Bitcoin can significantly improve the financial position of its citizens. Only about 30% of El Salvador’s citizens own a bank account, and almost a quarter of the country’s GDP is made up of remittances sent home by elsalvadorans living abroad. In the absence of a bank account, remittances are handled by large multinational companies. These companies typically charge an unreasonable portion of the funds sent in fees. There are many countries like El Salvador, and bitcoin can be seen as improving the situation of the most vulnerable people worldwide.

Bitcoin as an investment target

The price of Bitcoin is purely based on supply and demand. Bitcoin price goes up if people want to buy more of it and feel that owning bitcoin will give them more value. On the other hand, the price of bitcoin goes down if people want to get rid of their bitcoin holdings.

Bitcoin is a highly scarce digital asset. Bitcoin has also often been referred to as digital gold. This is not quite a breeze, as bitcoin, a traditional investment, is worth comparing to just another scarce investment, gold, due to its scarcity. Bitcoin has grown in popularity among investors in recent years. The increased interest of investors in bitcoin has been directly reflected in the increased market value of bitcoin.

People can invest in bitcoin today in many different ways. Various bitcoin-related investment products have entered the market, and the infrastructure developed around bitcoin has taken giant leaps forward. Bitcoins are more accessible to buy today than ever before. The ease of buying, the scarcity of bitcoin, and the added value that bitcoin brings to people have led to a situation where the price of bitcoin has risen significantly. If you are interested in buying bitcoin, the easiest way to invest is Northcrypto.

Bitcoin’s decentralized network, with a halving every four years and a predetermined maximum amount, are key features for investors. These properties create value for bitcoin as an investment and as a decentralized monetary system that will revolutionize the daily lives of hundreds of millions of people.

How is the value of bitcoin formed?

The more value people see bitcoin bringing to them, the higher the bitcoin price will be. However, bitcoin’s price development may not fully correlate with the added value that bitcoin offers to people. Bitcoin provides access to a fully decentralized open global monetary system regardless of socio-economic status. Anyone can download a Bitcoin wallet and start sending and receiving bitcoins.

The value of bitcoin can be seen to be made up of several different things. From an investor perspective, Bitcoin is a unique investment that offers an excellent alternative to traditional investment targets such as equities and gold. Bitcoin also provides an excellent alternative to the current centralized monetary system. In Western countries accustomed to well-functioning banking services and the financial system, the properties of bitcoin that improve people’s daily lives are often left behind in the debate. However, as inflation rises to record levels, Bitcoin, with its predetermined monetary policy and extreme scarcity, may begin to attract more interest in Western societies as well.

One of the most important tasks assigned to money is acting as a store of value. Reflecting the historical purchasing power of Bitcoin, for example, the purchasing power of the euro, the dollar, or any other traditional currency, it can be said that bitcoin performed this task much better than these currencies.

Thus, the value of Bitcoin is not limited to its role as an alternative investment. The value of bitcoin is also based on bitcoin’s unique technology and the properties of bitcoin that improve people’s daily lives.

Mikko Soon Head of Private Banking
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Last updated: 13.01.2023 15:26
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