How Bitcoin Conversion Rate Works
As an increasing number of people are becoming aware of and are getting more interested in Bitcoin, especially with its huge price increase, people often ask;
“What exactly gives Bitcoin value?” . So many people have found it difficult to understand how something like Bitcoin, which only exists digitally can have an actual value. Here, the reason for its value will be explained and how Bitcoin Conversion Rate with respect to fiat money is determined.
It’s all Economics
The question above is simply answered in one way, and that is economics. It is the principles governing the relationship between the scarcity, utility, demand and supply.
From definition, something which is both scarce and of use (utility) must have value and command a certain price, all other things remaining equal.
Gold is an example is a piece of metal explored from the earth – But why then does it command as much value as it does? Simply put, it is more expensive compared with other many utility metals from the crust because it is very rare, difficult to find and very limited in supply (scarcity). As well, gold is known to have uses consumers get satisfaction from (utility).
A combination of scarcity and utility of an item create the perfect conditions for the forces of demand and supply to determine its price in the market.
Just like gold, Bitcoin is scarce. It has a limited supply. Currently, there are just about 17.3million in circulation. The maximum Bitcoin that can ever exist is limited to 21 million. This well-known fact has made its scarcity very popular.
Nevertheless, Bitcoin scarcity is meaningless without having a use (utility). Bitcoin has its use in many ways.
Bitcoin is completely fungible (i.e. one Bitcoin is similar to others), it is divisible (small fractions exist) and is easily verified (using the Blockchain). It is not just scarce, it also has utility. Also, other desirable properties include its fast, borderless and decentralized nature, as well as a potential to revolutionize the financial world.
Bitcoin’s value is not limited to its use as a payment option, but also as a store of wealth (asset) Furthermore, the open protocol it is built on can be replicated, laying the foundation for future innovations from its source code. Many offshoots of the Bitcoin now exist, making use of the technology behind it, which is the Blockchain, to create groundbreaking platforms.
In addition, no other cryptocurrency out there is widely used, accepted and integrated presently as the Bitcoin. Other cryptocurrencies exist, but Bitcoin has the largest market capitalization among them all. Exponential growth has been the order for Bitcoin as more and more people troop in and companies accept it.
In the world today, thousands of companies and merchants already accept Bitcoin as a means of payment. Basically, the more people understand and use Bitcoin, the more the utility increases.
How is Bitcoin Price determined?
It is important to note that the price of Bitcoin is different from its value. The price is fixed by the market Bitcoin trades using the principle of supply and demand. In the same way the prices of an ounce of gold, used cars, etc. are determined, the price of Bitcoin is also fixed.
Like any product, the ongoing interactions between buyers and sellers determine the specific price of the Bitcoin per time on each market its being traded.
Although, one need to also consider the price buyers are willing to pay now for the future value of the item when determining the present price. Specifically, when the market believes price of BTC or any other property will rise in the future, the market will likely be willing to pay more for the property now.
Since the Blockchain and the Bitcoin are evolving technologies, many utilities of the Bitcoin will still hopefully arise, especially unprecedented ones.
Why the price fluctuation?
Well, volatility is the name of the phenomenon. It doesn’t only affect the Bitcoin conversion rate. Many things such as stocks, oil and gas, fiat currencies, and many other properties change price every now and then against base currencies like the US dollar.
With the relatively small size of the Bitcoin market compared to other industries, it takes little amount of money to flip the prices, thus resulting in its volatility.
In recent times though, the price of the Bitcoin has become quite stable. The volatility is becoming lower and lower as more people and corporations adopt it.
In summary, if something is scarce and useful, a price will surely be demanded for it. Bitcoin fits the bill and it’s ascribed a price which is determined by the supply and demand for it.
Also, take note that the price and value of the Bitcoin are two separate things. This price fixed by the market for Bitcoin against a base currency (like the USD) is the conversion rate, which is then converted to other fiat currencies.
Sometimes, analysts do say that the market price of a commodity might not be a true reflection of its value.