The value of bitcoin: what determines the value of bitcoin?

Have you ever wondered why 100 rupees equals the amount we assume? A few years ago, when the government de-circulated some units of currency, 500 and 1,000 rupees became worthless overnight. So what gives Rs 2,000 worth today?

Of course, there is a complex relationship between supply and demand metrics, but it boils down to confidence! The confidence we place in government and the existing monetary system. Bitcoin (BTC) is not issued by a central bank or backed by a government, so where does its intrinsic value come from?

When we talk about the value of Bitcoin, aspects such as decentralization, distribution, scarcity, security and trust systems play a role at the same time.



Decentralization, distribution and security

Rather than relying on central authorities, blockchain gives users power and freedom.

No single entity can make decisions on behalf of everyone. Distributed Ledger Technology (DLT) is unrestricted and has no authorization. It is transparent and safe. DLT does not store information in any one place. Instead, it distributes information over a peer-to-peer network. Distributed Ledger Technology (DLT) and its immutable record of transactions are accessible to all network participants.

The benefits of a blockchain network include greater trust and security, as members of the network will receive accurate and timely data. In addition, no one can delete a transaction.

rarity and trust

The main source of Bitcoin’s value is restricted supply and increased demand. Offer is programmed to be limited. Unlike traditional money, bitcoins are not printed. Instead, they are extracted from the system. Bitcoin relies on a decentralized network of independent nodes to approve consensus-based transactions.

In simple terms, miners have computers (or nodes) that run the mining software. Only 21 million BTC can exist.

A rare asset can command a high price, while an abundant asset has a lower price. There has been a decrease in the supply of Bitcoin since its inception. There is a fixed rate at which bitcoins can be generated, and this rate is designed to slow down over time.

After every 210,000 blocks, or roughly every four years, the number of bitcoins minted per block is reduced by 50%.

Miners solve transaction-related algorithms that verify bitcoin transactions using software.

As a reward, miners receive a certain amount of bitcoin per block. In this way they are provided with an economic incentive to continue solving transactional algorithms, thus supporting the system as a whole. Miners not only verify and verify transactions, but also ensure that new bitcoins are added to the system at a predictable, steady rate. This is where confidence comes into play again.

Bitcoin users do not need to trust each other but only need to trust the technology of the token and the level of security. There is a production cost for bitcoin, and it depends on the block reward, electricity cost, mining difficulty, and energy efficiency of the miners.

Since there will only be 21 million BTC, what will happen when they are all mined? Since these tokens are issued per block at a decreasing rate approximately every four years, the last bitcoins are expected to be issued in the year 2140.

Around the year 2140, the amount of BTC in circulation will remain stable at this level. This number was arrived at taking into account the average time taken to verify and create blocks, which is supposed to be ten minutes.

So every 10 minutes, a certain amount of BTC is entered into the supply, but this supply is designed to be reduced by 50% every 4 years.

What is driving the economies behind BTC at the moment is the limited supply, which makes it scarce. Once all the BTCs are mined, the underlying economy is bound to change. What the miners will then rely on is the transaction fees.

Bitcoin was originally envisioned as a medium of exchange, but it is often not used as a store of value.

This ecosystem is still developing, so its underlying narrative could undergo another transformation between now and the time of the last BTC mining. So what is the economic incentive for miners when all BTC is mined? They will be rewarded with a transaction fee.

When it comes to any asset of value, the price one agrees to pay for the asset is generally socially agreed upon and depends on supply and demand metrics. Since BTC is a digital currency, an intangible currency, many have criticized its intrinsic value, failing to understand the scarcity and cost of production metrics.

BTC is often equivalent to monopoly money – fake. But those who understand the rarity and complexities of the protocol see value in this.

(Author Darshan Bateja is CEO and Co-Founder, Vold. Opinions are subjective)

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