Bitcoin, the original crypto currency, is without a doubt the most well-known digital asset. While few people gave it even the benefit of the doubt some years ago, it has certainly made an impression since its humble beginnings. So much so that it led the way for other crypto currencies to be created, and of which there are now hundreds. The concept of dematerialized money has always been an intriguing one and, to this date, investors are still puzzled by the fluctuations of Bitcoin’s value.
Let’s delve a little deeper into this particular crypto asset: its definition, its characteristics and, most of all, the factors that affect its price.
What is Bitcoin?
What is Bitcoin, really? This issue is subject to debate. Network, currency, financial instrument, raw material… the many definitions Bitcoin seems to deserve do very little to put a stop to the general confusion.
It’s worth keeping in mind that the term Bitcoin refers both to the network made up of connected members who carry out exchanges of value and the token itself: the “currency” as such. The network is open to anyone and its users simply need to download the Bitcoin protocol onto their computers, thus becoming nodes themselves. They may also take part in exchanges via intermediary platforms. Each time a user validates a transaction, the latter is added to the Blockchain.
The transaction validation process consists in solving complex equations by relying on very powerful computer components which deliver exceptionally fast computing capabilities. This system through which Bitcoin tokens are created is called “Proof of Work”. Every time an equation is solved, a new transaction block is added to the chain and Bitcoins are “released”. That’s the reason why Bitcoin is often compared to a raw material which needs to be extracted. Since the process is very time-consuming and resource-intensive, the miners are compensated in the form of Bitcoin tokens for each new block they add.
Why is there only a limited number of Bitcoins?
Currently, each time a new block is added to the Blockchain (which happens roughly every ten minutes), BTC 12.5 (or Bitcoin) are created. It’s up to the miners whether they want to release the tokens or not.
Unlike fiduciary currencies such as euros or US dollars – inflationist currencies which can be generated endlessly – only a total of 21 million Bitcoin may ever be mined… and we’ve almost reached that number! As we write these lines, a little over 18 million tokens have already been mined and 1,800 additional tokens are released every day. Of course, this has an impact on Bitcoin’s value, since the rarity of the asset should start to be felt by 2022. Only available in limited quantities, Bitcoin emulates precious metals, in the sense that if demand continues to rise, it will be more and more difficult to meet. The founders of Bitcoin created this system of rarefaction on purpose, hoping that its price would evolve proportionally.
Contrary to centralized fiduciary currencies, the power in place has no direct influence on Bitcoin’s value. Price fluctuations are therefore mainly dictated by supply and demand. This means that the price can easily be manipulated as large investors may purchase and hold on to a large number of tokens for as long as they please. The result is that Bitcoin’s value goes up, only to suddenly drop if they decide to release their assets en masse. Historically, the price of Bitcoin has proved particularly chaotic due to such manipulations.
Over ten years of ups and downs
Ever since it was launched in 2009, Bitcoin’s value has fluctuated significantly. Back then, $100 was enough to purchase BTC 100,000, which explains why those who decided to invest in this completely novel asset were greatly rewarded. Given the limited number of miners on the network, mining used to be fast and inexpensive to reflect the token’s negligible value.
In 2010, Satoshi Nakamoto’s (the legendary creator of Bitcoin) adjusted protocol made the price of BTC shoot up to $0.40. In June 2011 a Bitcoin token was worth €28 but went down a few months later. This first “bubble” drew the attention of the media to the Bitcoin phenomenon. Naturally, this sudden burst of interest strongly impacted the crypto sphere and caused many to take up mining. By the end of 2012, miners were only receiving BTC 25 instead of the 50 they were used to. On April 9, 2013, Bitcoin experienced a speculative spike which made it reach €289 only to fall back down to €40 a few days later. By the end of the year, the $1,000 mark was passed for a few days. 2014 was a year of degrowth and caused Bitcoin’s value to drop down to $177 at the beginning of 2015.
In 2017, the price of Bitcoin reached an all-time high. That year saw the price of BTC go from $950 all the way to $20,000 by then end and fall back down to $15,000 at the beginning of 2018!
Nowadays, Bitcoin’s value is significantly lower.
What’s the true value of Bitcoin?
The true value of Bitcoin can only be an approximation. Its decentralized protocol, which depends on a consensus involving all the nodes that administrate the network, implies that no one is in any position to “decide” on a specific price for BTC at a given moment.
The prices displayed on CoinMarketCap (for instance), reflect what those who wish to buy Bitcoin are willing to pay. In practice, its value isn’t determined by any market.
How is Bitcoin’s value influenced?
Supply and demand is the factor which has the most direct influence on the price of Bitcoin. Of course, this criterion itself is the result of a number of events, all of which have to do with BTC.
The total number of tokens in circulation does, as we have seen, affect their value. Code updates, possible cyber attacks on the network or even the interest prominent celebrities show towards this cryptocurrency encourage investors to purchase or, on the contrary, to sell their Bitcoins.
Finally, political and economic events around the world, such as decisions emanating from governments or major crises have the ability to influence the crypto market.
In which countries is Bitcoin used?
Bitcoin, as a currency, is completely independent from any country, government or institutional authority. As such, no country uses it as an official currency (even though, recently, Japan has recognized Bitcoin as an official currency).
In several developed countries such as the United Kingdom, France, Sweden or Japan, Bitcoin transactions are now commonplace. This may be explained by the fact that investors are interested in the idea of a politically independent currency. The uncertainty the world felt towards Donald Trump’s rise to power, for instance, translated into a spike in Bitcoin’s value.
In developing countries, the adoption of Bitcoin may constitute a beneficial response to the volatility of local currencies. The inhabitants of these regions, where there are sometimes no banking systems in place, may resort to it to finally have access to a dematerialized international financial solution.
How to buy Bitcoin
Knowing how to buy Bitcoin may seem like a privilege. However, platforms, exchanges and other solutions through which one may buy Bitcoin hope to make themselves more accessible to inexperienced investors.
The concept of trading is no longer as nebulous as it once was. It therefore constitutes a good entry point for those wishing to start on their own Bitcoin adventure relatively serenely. There are also solutions available for those who prefer to only speculate on Bitcoin’s value by holding on to their assets. For instance, you can visit a crypto-currency e-commerce site such as Bitit. There, you’ll be able to purchase Bitcoin just as you would any other commodity online and store your tokens on an online wallet, on a software wallet or on a physical wallet for optimal security.