So you have heard about the virtual currency that has taken the world by storm. But before you decide to buy bitcoins off the internet, you need to understand the Bitcoin Worth, how bitcoin works and how it’s value is arrived at.
Bitcoins can be a great avenue to invest your money in but if you are looking to invest, then you need to ascertain the future value of your investment in order to get a better perspective of ROI (Return on Investment). Just like any other investment like say forex, there are factors that you need to take into consideration before you start investing physical money into virtual currencies.
The first thing you must know about bitcoin is that it is limited which means that at one point of time, it will stop from production. This leads us to our second important point which is based on the first – demand and supply.
This is not just true for bitcoin, but for any other currency in the world. This is how the government of any given nation at any given point of time is able to print more notes and coins. If something is available endlessly then it loses its importance and perspective.
Technology has played its part in printing of the traditional notes and coins too, but virtual currency is where it has really shined.
Potential Value of Bitcoin
Bitcoin is limited – Demand meets supply
The bitcoin is based on blockchain which limits its supply to 21 million. The algorithm works such that the total number of bitcoins that can be mined (created) halves every four years. The demand of bitcoins is going to increase as more people join the bandwagon. At 21 million bitcoins, there is not enough bitcoins for each one of us. Since only a set number of bitcoins will be mined every 4 years, the mining will continue for the next 100 or so years giving things more perspective. It also gives people, government and society at large to accept this new form of currency.
So in theory, as more bitcoins are mined, the process becomes harder and even less number of bitcoins come into existence because the number of bitcoins that can be mined gets halved every 4 years. Miners have to compete even more because of this resulting in fall in supply and a subsequent rise in demand. This increase in demand will increase the prices of bitcoins and hence the miners’ efforts will be rewarded. This is so far working.
As the total number of bitcoins that can ever be mined is set to 21 million, there is going to be a serious supply crunch. This assumption is based on the theory that bitcoin is going to be commercially accepted as an alternative currency. It is already being accepted by some hotels and eCommerce websites.
The bitcoin algorithm is so designed that in order to mine new bitcoins, you need to solve a problem. These problems are getting harder and harder making it all the more difficult for miners to mine new bitcoins. As per the formula, the last bitcoin will be mined in the year 2140. This is because the number of bitcoins that can be mined is halved every 4 years and the total number of bitcoins that can ever be mined is 21 million. This process is known as halving.
As problems that are needed to be solved in order to mine bitcoins get harder, miners have to spend more time and energy for lesser and lesser number of bitcoins. As the number of new bitcoins that are mined annually reduces, demand automatically increases which will keep prices going north.
Each bitcoin can be split into 1 million parts. The smallest possible denomination of the bitcoin is known as Satoshi. It shares its name with the founder of bitcoin who is only known as Satoshi Nakamoto.
If a bitcoin is lost, it can never be recovered and already there are reports of several bitcoins that were lost because people forgot the access codes.
Bitcoins that were confiscated
A lot of people used bitcoins on the black market on the internet to buy illegal stuff. One such famous website was the Silk Road and the only way to access the dark web (websites like Silk Road) was to use a special browser called TOR.
USA government confiscated a lot of bitcoins when they caught the owner of the notorious website. However, there are still over 144,000 bitcoins that are out of circulation.
In the year 2014, Mt Gox, an online bitcoin exchange, reported that over 744,000 bitcoins were stolen from the website. In the fiasco that later followed, 200,000 bitcoins were recovered from an old wallet while the rest are still unaccounted for.
Some of the largest wallets on the blockchain is being closely watched by industry followers, and it is widely believed that Satoshi Nakamoto, the founder bitcoin owns and controls over 1 million bitcoins himself.
More and more people are jumping the bitcoin bandwagon. As acceptance grows, more people will want to invest in it leading to an increase in demand. The increase in demand with limited supply will lead to an increase in the value of bitcoin. There is a reason why a single bitcoin can be divided into 1 million smaller units
The ecosystem around bitcoin is slowly emerging with more people buying them, more eCommerce sites accepting them and there are now ATM machines to withdraw your bitcoins. People are now ready to pay and receive dollars to trade bitcoins. This gives the cypto currency some weightage and also leverage. Primary reason of why bitcoin has a value at all.
Bitcoin against real money
Bitcoin will probably exist as an additional currency rather than replace actual money that is printed by government based on their gold reserves. Government functions on a tax structure and it is important for them to collect this tax from the citizens.
The general acceptance towards the crypto currency is increasing by the day with infrastructure being developed to support the currency. As the acceptance level increases, the possibility of a failure seems to be reducing.
The future value of bitcoin should go north with some prominent figures estimating it to be near $2.8 million. While that might seem way too high at the moment, who knew bitcoin will even reach $1000 four years ago. So no, the value of bitcoin has not peaked yet and it should continue to rise as supply reduces, demand increases and overall general acceptance level increases.