How Bitcoin Gains Value Over Time
Maybe you've heard stories about people making a killing from the crypto upswing. However, several people also lose millions whenever prices experience downswings. That indicates how volatile cryptocurrencies are, with constant upward and downward price movements. But many individuals might not know how Bitcoin overcomes all the volatility challenges to gain so much value over time. Well, the following article explains how Bitcoin gains its value over time.
Supply and Demand
Supply and demand economics are among the key drivers of Bitcoin's value. Supply mainly refers to the number of new coins mined and current owners willing to sell their tokens. An asset is likely to attract higher prices if scarce or limited in supply. On the other hand, it will draw lower prices if available in plenty.
Bitcoin's supply has been declining since its inception. Its protocol allows miners to generate new tokens at a fixed rate, slowing down over time. For example, Bitcoin's supply slowed from 6.9% in 2016 to 4.4% in 2017 and 4% in 2018. Bitcoin also undergoes halving, further driving its diminishing supply.
Bitcoin's fixed mining rate and halving induce scarcity, making it scarcer over time. That attracts higher prices, allowing Bitcoin to gain value and retain a more substantial purchasing power over time.
On the other hand, demand depends on a wide range of factors. However, it mainly increases based on the public's trust in Bitcoin. The need for Bitcoin will undoubtedly increase if many institutions adopt it as payment and a store of value. Bitcoin hasn't found favor as a medium of exchange but, it is already attracting several retail investors and businesses.
Thanks to increased media coverage and intense campaigns by industry leaders, Bitcoin's demand has significantly risen. Bitcoin is the primary asset traded in large volumes on crypto exchange platforms such as https:/bitcoins-era.io/ daily. Several global consumers also increasingly use Bitcoin to pay for goods and services.
Bitcoin's diminishing supply and growing demand are the main factors fueling its prices, allowing it to gain immense value over time.
Cost of Production
Like with other commodities, the cost of minting Bitcoin is also critical to its price. Research shows Bitcoin's marginal production costs have a close relationship with its value. The cost of production is the sum of the direct fixed costs for electricity and infrastructure and indirect costs related to Bitcoin's algorithm's difficulty level.
Bitcoin miners receive rewards for solving complex mathematical puzzles to generate new tokens and verify transactions. However, the process requires considerable computational power, meaning miners must spend vast sums of money on equipment. Besides, Bitcoin mining also consumes vast amounts of electricity.
The varying difficulty levels of Bitcoin's algorithm can increase or slow down the rate of producing new coins, impacting its overall supply and price.
Bitcoin is the most prominent virtual currency, but it also faces increasing competition from other virtual currencies in the market. Bitcoin dominated the crypto trading platforms in 2021. However, this has changed over time. Bitcoin's dominance decreased from 80% to less than 50% of the overall crypto market capitalization between 2017 and December 2021.
Several digital currencies like Ethereum have become more popular, impacting Bitcoin's diminishing market dominance. While the stiff competition has siphoned off investment dollars from the Bitcoin ecosystem, it has also attracted investors to the asset class. Bitcoin has benefited from increased crypto awareness, and its value has grown significantly.
Individuals and businesses have used Bitcoin for more than ten years but, it remains a nascent asset class. Thus, a combination of factors may determine its price. However, it mainly gains value based on supply and demand, production costs, and competition.
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