Bitcoin: What Gives It Its Value?

Many have no doubt that Bitcoin has value. And if it’s worth it, it’s difficult not to ask how much a Bitcoin might be worth.

There are two primary theories used to calculate one Bitcoin’s probable value.

The very first theorizes that Bitcoin, perceived by some as a better utility than gold, could end up completely replacing gold as a valuable product. If gold were to be completely replaced, one Bitcoin might be valued $357,000.

That’s calculated by taking the complete value of all the gold ever mined in the globe, which is around $7.5 trillion, and dividing that amount by 21 million — the entire Bitcoins that can ever exist.

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An expert estimate that assuming that Bitcoin can substitute 5% of gold in five years, a coin will worth $25,000.

Another theory of the expert is based on Metcalfe’s legislation, which says a network’s value is equal to the network’s square the number of consumers.

One phone is useless, for example, because with it you can’t call anyone else. But as other individuals get phones, the value improves exponentially.

Researches have shown that using 10 years of information, the law of Metcalfe is true for Facebook. It also stands true for the biggest social media organization in China, Tencent.

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Fundstrat studied users on the Bitcoin protocol and discovered that 94 percent of the changes in Bitcoin rates since 2014 has been explained by the square of this value.

Many individuals believe Bitcoin is a bubble, as well as the notion that Bitcoin has got no value is expected. But there is a reason to think this is simply not true.

Bitcoin is scarce by definition. And the cryptocurrency may be useful to retain and exchange wealth as a viable alternative. That’s why so many people started trading it, either on exchanges or with systems like Bitcoin Loophole.

What Dictates the Value of Bitcoin?

SPECULATIVE VALUE

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Much of the value of a cryptocurrency is speculative–that is, it is priced at precisely what others are prepared to pay for it. If people choose not to sell their Bitcoin for less than $10,000, the price will be $10,000.

If even an individual chooses to get below that stage in the marketplace, then the price will go down. The same applies to movements upwards.

Speculation is the main reason for the extremely volatile nature of cryptocurrencies.

Let’s think of a share of about $1,000 in a business-like Alphabet. The market must decide that keeping this business is somewhere in the domain of $1,000 which Alphabet must achieve.

The SEC requires Alphabet to provide the public with economic information in the form of multiple reports, like the 10-Q and 10-K. According to their assessment, these financials assist investors to gauge whether Alphabet is worth $1,000 or $20.

Most investors would agree that the $1,000 share price is a good one to consider for Alphabet’s finances.

There are no financial fundamentals with cryptocurrencies as it is not a traditional business. There are no revenues, profit margins, sales of products or profits per year.

It’s an asset that relies on purchasing your portion of the total market cap from other individuals. If the market chooses that 1 Bitcoin is valued $10 rather than $10,000, that will be reflected in the price.

A big aspect of speculative volatility is therefore because it is mainly based on consumer sentiment and not on financial analysis.

INTRINSIC VALUE

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Having said all this about speculative value, it is essential to point out that in a cryptocurrency there will always be some inherent value because of the complexity of the technology.

There’s something termed a network effect; a network’s value rises proportionally to the number of individuals in the network.

This applies to all types of telecommunications, but it is very essential for cryptocurrencies as you can immediately assess the value of your network participation through the crypto asset price. All things being equal, the more the people who use a cryptocurrency, the higher the price.

CROSS COUNTRY VALUE REMITTANCE AND TRANSFER

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The functional distinction between a Bitcoin-like cryptocurrency and standard fiat currency is this: For cryptocurrencies, sending cash across domestic boundaries costs the same whether you spend $10 or $1 million.

So far, no companies are taking a percentage-based cut (except for exchange charges that you are going to use to convert crypto into fiat). Crypto and fiat taxes apply.

The aspect of remittances is worth more than $600 billion annually. Virtual currencies and blockchain technology would play a significant part in de-risking transfers of funds globally.

This implies that traditional companies like Western Union when dealing with the safer, quicker and cheaper blockchain option, will not pay such exorbitant prices for remittances.

SECURITY OF THE NETWORK

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When it comes to security, inherent value is allocated to the security of an asset. That’s why some nations may have negative rates on their treasury bonds. Safety is not only in its possession or transfer but also in the scheme as a whole. A lot of value is placed on security.

The $10,000 value of Bitcoin is due in part to the stability and resilience of the Bitcoin network to hacking and security breaches. Bitcoin has been the topic of countless attacks in its 9-year history, but never once had the blockchain failed.

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A 2013 transaction is as secure as a 2018 transaction and will remain to be Byzantine Fault Tolerant. Bitcoin is cryptographically secure; this means “brute force” is not possible. No computer seems to be thermodynamically strong enough to take over the network and break the hashing algorithm.

The “Bitcoin hacked” news that you read in the news is always linked to the exchanges or a third party that interacts with the Bitcoin network instead of the Bitcoin blockchain itself.

Mt. Gox was a cryptocurrency exchange and the biggest theft in cryptographic history. The Bitcoin blockchain, however, stays safe and secure to this day, one good reason why Bitcoin is valuable.

LIQUIDITY

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The liquidity of Bitcoin is another significant reason why prices are so unstable. Most cryptocurrencies respondents still want to be able to swap their crypto-assets for paper currencies.

There are not many methods to do that at the moment. There are bottlenecks in the form of exchanges that are new and certainly not faultless, and banks that succumb to the guidelines of regulations. The exchange markets are small compared to even a lower stock exchange.

It should be noted that within blockchain tech there are built-in boundaries that add to the liquidity issue. Only about 7 operations per second can Bitcoin transact.

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About 30 transfers per second can be done by Ethereum. This is because the present cryptocurrencies generally rely on proof-of-work schemes that value safety over speed.

Many factors can be attributed to the current value of Bitcoin as examined above.

Most of the value of Bitcoin or any digital currency is strictly speculative. That’s not to say all cryptocurrencies have no worth.

Bitcoin price relationship with network effects implies that users will always be a powerful price measurement. Besides that, Bitcoin today has intrinsic value because it enables an inexpensive and secure transfer of value.

Network safety is a bonus, but in the medium term, the absence of liquidity in virtual currency markets will result in highly unstable rates.

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