Bitcoin is now a regular news item, and a term that has entered the vocabulary of anyone with a slight interest in investment or the stock market. In recent weeks it has been in the news for passing $30,000 for the first time, shortly followed by a brief period above $40,000. But how much is bitcoin actually worth, and how does it gain value?
What is Bitcoin?
Bitcoin is a cryptocurrency, a digital currency that has been designed to work without reliance on any central bank. Whereas national currencies such as the United States dollar and the pound sterling are physically printed and controlled by their respective nations, bitcoin has no physical representation and no central bank or administrator.
Instead, bitcoin is managed through a public ledger known as a blockchain. This blockchain is a series of blocks, built in a secure manner such that the authenticity of one block is dependent on the previous block – and these blocks can be used to store the transactions between users of bitcoin.
The U.S. Federal Reserve determines how many dollar bills are printed each year in the United States. However, with no central authority, bitcoin must have a self-managed way to create new currency. This is achieved through a process called bitcoin mining, where users of bitcoin use their computer processing power to calculate new blocks in the blockchain.
The cryptographic mathematics behind blockchain and mining make it incredibly difficult for an attacker to forge bitcoin or alter any existing blocks in the blockchain. Bitcoin is therefore much more resilient to counterfeits than traditional currencies.
How Much Is Bitcoin Worth?
Since the start of 2021, the price of a single bitcoin has hovered between $30,000 and $40,000, with a trading price of $33,224.60 by the end of January. This is an almost 400% increase on its approximate $7,000 value at the start of 2020. At the start of 2015, bitcoin was valued at just $300.
Although the price of bitcoin has risen almost year-on-year, it has not been perfectly consistent. Towards the end of 2017, bitcoin was valued at almost $20,000, but a year later, it had fallen to almost $3,000. Many traders will be cautious to tell you to invest in bitcoin due to its volatile nature. It has been described by some leading economists as a bubble waiting to crash or burst.
How Does Bitcoin Get Its Value?
On a simple level, the value of a single bitcoin is based upon supply and demand. The mathematics behind the bitcoin mining process means that the supply of bitcoin can be known well in advance. But as the demand for bitcoin increases, the price will also increase. As the demand decreases, the price decreases.
As previously discussed, bitcoin is a decentralised currency that is hard to counterfeit and has a predictable supply. These traits are attractive to many who choose to invest in bitcoin or use it as an alternate form of currency. In fact, it is so attractive that some businesses have started accepting bitcoin as a method of payment.
Other positive traits include the high durability of bitcoin in comparison to currencies such as the US dollar, and the ease at which it can be traded or used as payment when compared to gold. On the other hand, there are many traits of bitcoin that cause its volatile nature and may cause investors to not invest in bitcoin.
Bad news events can cause large shifts in the price of bitcoin. In its early days, bitcoin was frequently used by bad actors on the dark web such as hackers and drug dealers. This included the high-profile use of bitcoin on the online black market Silk Road, famous as a digital platform for selling illegal drugs. This led to fears that bitcoin could be regulated, which would negate some of the positive traits of bitcoin. The news hurt bitcoin’s value.
Collapses of big bitcoin exchanges can also damage the price of the currency. The Mt. Gox exchange was handling over 70% of all bitcoin transactions at the start of 2014, but it quickly fell into bankruptcy alongside reports that hundreds of thousands of bitcoins transferred on Mt. Gox had gone missing. In just over a month this saw the price of bitcoin drop by 36%.
There were similar experiences when South Korean cryptocurrency exchange Yapian Youbit was hacked and lost 17% of its cryptocurrency, ultimately forcing the exchange to file for bankruptcy.
Hacks that are not specifically targeted towards cryptocurrency exchanges have also been known to affect the price of bitcoin. The 2014 Heartbleed bug that targeted vulnerabilities in OpenSSL, software designed to allow secure communication over a network, saw bitcoin prices plummet by 10% in a single month.
It is evident that the price of bitcoin can be severely affected by news articles and events, causing it to drop greatly in value in a short amount of time. However, in bitcoin’s relatively short existence it has continued to bounce back multiple times.
Anyone who invested in bitcoin early on will now have a sizeable worth, providing they are able to exchange it before the price drops. And if history tells us anything, it is that the price of bitcoin will drop again, and it may recover too. But how long will this cycle continue before bitcoin either becomes a mainstream currency, or before it disappears altogether? That is the million-dollar question.
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