The price of bitcoin in US dollars or Nigerian naira is determined by the market, i.e. by the meeting of demand with supply. However, the supply of Bitcoin is of an inelastic type, as economists point out, as it is insensitive to changes in demand. The units of bitcoin in circulation increase over time, regardless of the dynamics that support or dampen demand.
The demand for Bitcoin, on the other hand, is perfectly elastic, because the increase in supply is implicit in the expectations of users. Consequently, the fluctuations in the price of bitcoin are exclusively a function of the change in demand. It is therefore important to ask what are the concrete factors why an individual wishes to own a certain amount of bitcoin rather than keep his dollars or euros? We can substantiate that individuals want to get bitcoins because they value them; so let’s see what are the values recognized in bitcoin:
Values Related to Technology
Bitcoin is foreshadowed as an unprecedented computer system, and this is the main reason it has attracted many users to the world of virtual currencies when many of their prices were still close to zero.
They derive from the characteristics of decentralization and therefore of independence from banks and governments, of guaranteeing privacy compared to traditional fiat currencies. Moreover, social values grow as the diffusion of the digital currency increases, because of the probability of its use on a large scale increases.
They derive from the effectiveness of bitcoin as a payment system, in the face of its speed and for the advantages associated with low transaction costs or for the possibility of making payments in every corner of the Earth from home.
At this point we decline what are the factors that affect the demand for bitcoin and therefore its price:
- Interest: The spread of news on bitcoin fuels the market valuation of the cryptocurrency. This is demonstrated by google where the statistics of the number of typings of the word bitcoin with the price trend are positively correlated. In particular, it was noted that the relationship is more pronounced in the long run than isolated bursts of volatility, where interest mainly captures speculators, further supporting the price to rise. On the other hand, in downward retracement cycles, interest has already fallen and is dragging the prices even further
- News: Negative news feeds uncertainty, however in a decentralized system their effects weigh more than in a centralized system. We refer to the theft of private keys from the servers of exchange platforms; the drop in price due to these events is the result of a loss of confidence in general. Conversely, positive news mostly creates positive effects on market value even in the long run, increasing the spread of currency and demand
- The use of bitcoin in transactions: It conditions the spread of bitcoin as it is proposed as an alternative payment system. The effects of the increase in the use of bitcoin for real transactions leads to an increase in its price in the long run
- The use of bitcoin in speculation: Using bitcoin as an investment instead of a payment system determines effects on the market value of the cryptocurrency. According to most scholars, the intervention of traders and investors can have positive repercussions on the price, as they take the risk of holding quantities of bitcoin instead of other users intimidated by its volatility. However, this category of financial operators often causes short-term instability.
It is certain that by 2040 the number of bitcoins in circulation will be 99% of the predetermined total, but it is difficult to establish what their price will be since it will mainly depend on the use that will be made of them, an aspect that is difficult to predict at the moment. However, it is thought that if bitcoin finds widespread acceptance as a payment tool in the future, its price will rise, as many more individuals would be willing to use it for their purchases.
This eventuality may derive from a relatively long process, the exclusive result of the progressive discovery by the market of the real value in the use of bitcoin and a gradual understanding of individuals of the importance of the phenomenon.
Currently, the decomposed volatility of the bitcoin market shows that the “right” value has not yet been given to the cryptocurrency. Moreover, the sudden fluctuations depended on the alternation of periods of optimism and uncertainty, supercharged by speculative positions, however arousing greater interest in cryptocurrency, helping to increase its popularity and the possibility that new subjects become part of what is a real community on the Net.
In summary, today’s market situation is inevitable and not necessarily negative, considering that the cryptocurrency phenomenon is still young.