For anyone interested in buying Bitcoins to trade or for long-term investment, the question, “What is a Bitcoin worth?” is of vital importance. Of possibly more importance is what will a Bitcoin be worth in the future?
As with any currency or investment asset, there are many factors to consider. This page will discuss a number of important elements that will help you to understand this issue better.
Firstly, supply and demand is important in any asset class. One of the elements that holds many currencies back for long-term investment is the ability of the government of the day to produce more coins and bank notes, impacting supply. Economics has many ways of measuring the growth of money supply (such as M1, M2 and M3 rates).
Whilst old bank notes are constantly being destroyed in an organised fashion by the government, more new ones are always being printed. Additionally, the emergence of computers has made it much easier for a government to create new money without even bothering to switch the printing presses on.
Why Is Bitcoin Supply Limited?
In contrast, the Bitcoin algorithm is designed to limit the number of coins that will ever exist to 21 million. Even more than that, the problems that need to be solved to mine more coins are becoming harder over time. The algorithm is designed so that the number of coins that can be mined halves every four years. This will guarantee some new coins will come into existence annually for around another 100 years.
This process is known as the halving. What happens is that the reward for solving problems on the blockchain that verify transactions reduces by half. This means that all the miners competing to earn coins have to compete harder for less reward. The general thinking is that as the rewards reduce, new coin creation reduces and therefore the lower supply causes higher prices that make the effort of mining worthwhile. That, at least, is the theory…
Already, it can’t be hard to see that 21 million is much smaller than the population of the world if everyone was to own just one coin. Should BTC really take off in the future and gain widespread acceptance, then there is likely to be a very serious supply crunch. That ought to send prices much higher.
Each Bitcoin is split (just like a normal dollar, euro or pound is) into smaller denominations. Each one has 100,000,000 (one hundred million) parts. The smallest denomination is known as a Satoshi.
However, it is already known that some are lost, never to be recovered. This is one of the perils of crypto currencies, if the access details are lost or stolen, the money is essentially gone forever. Am example of this happened in the UK in 20131. James Howells had been an early miner of BTC and had some 7,500 stored on the hard drive of his computer. A computer that he then threw away. Somewhere in a landfill site in Newport is a pc that is worth several million dollars. Who knows how many coins have been lost like this since the launch in 2009?
One problem is that in the early days, the price of a Bitcoin was measured in cents or single digit dollars. There was no real indication that the price would one day rise into the hundreds of dollars each and then past one thousand. Suddenly, those coins that meant very little are quite valuable. There are probably many more thousands of coins – a few dozen here and a few dozen there – that have been lost forever. Overall, this has a small, but important impact on total Bitcoin supply.
There are many people that speculate on sites like reddit that in total perhaps between 1 and 2 million coins might ultimately be lost. Therefore, if 21 million coins did not seem like many for the total population of the world, 19 million seems like a lot less!
When it comes to the total supply, it might be a good idea to imagine BTC as being like stock in a company quoted on Wall Street. Companies issue a fixed amount of shares and the value of them fluctuates related to supply and demand. The differences, of course, are that companies can increase or decrease the total supply if a motion to the existing stockholders is passed and that a company issues all their stock in one release, whereas Bitcoins will continue to be mined for many more years. For these reasons, many people that play stock market investments will recognise the similarities.
What About Confiscated Bitcoins?
The early history of crypto currencies involves crime as people tried to make anonymous purchases online out of the sight of governments and law enforcement. The most notorious site that enabled this was called Silk Road and could only be accessed via TOR – a privacy tool.
In mid 2013, the government of the United States tracked the owner down and took the site offline. At the time of writing, the man arrested is still awaiting trial.
However, the FBI were very confident that they had been able to trace the Bitcoin wallet used by the site owner, whomever he may actually be. As such, they have been able to confiscate the wallet and prevent it’s contents from being used. While it is believed that they will never be able to spend the coins themselves, this is still more coins that are out of circulation from the overall Bitcoin supply. The number? 144,0002.
What About Stolen Bitcoins?
The events at Mt Gox in early 2014 potentially add many more coins onto this unusable list. The reports from Mt Gox about what happened are quite confusing for the lay person without a background in cryptography. However, it seems that around 744,000 coins were somehow stolen from the exchange. In a later release, it transpired that they then found 200,000 coins in an old wallet. This is a story that will unfold over the years, but the result seems to be that more coins are out of action. How many and for how long, who knows?
What About Hoarded Bitcoins?
There are a number of early miners whose wallets are relatively well known and watched for action within the public blockchain records. Several of the earliest are believed to be owned by Satoshi Nakamoto, whomever he or they may be3. It is believed that he controls around 1 million BTC4. While these coins are usable, the reality is that while they are in cold storage somewhere, they might as well be lost forever. This certainly has an impact on the value of Bitcoins.
Changes In Demand
In the early days, all crypto currencies were very geeky tech concepts with virtually zero public acceptance. However, as the years have passed and more people have jumped on board and more publicity has followed, the demand has increased.
One of the key elements to public take up is the ecosystem of services and websites that make the process of buying and selling BTC easier. For example, there are now ATMs around the world (information here). There are more sites whose purpose is to make trading between alt coins possible. There are more and more merchants that accept BTC as payment for goods and services. As these elements all increase and improve, more public acceptance will come.
Why Does Bitcoin Have Value?
To a certain extent, the fact that people are willing to pay money for a coin provides the value – it is a show of trust in the system. It can be argued that a coin or note issued by a government is the same. Intrinsically, a $1 note is just a piece of paper, but because we trust and expect other people to honour it’s value, it has value.
The way the algorithm and overall concept of many alt coins is designed, the more demand there is, the more prices should be expected to rise. In this regard, there is a very clear relationship between supply and demand on market value and price.
Another important aspect is that for most of it’s history, it was impossible to buy using any sort of debt. Because the blockchain is immutable, transactions cannot be reversed, meaning that funding sources such as PayPal or credit cards were not allowed. Obviously, if everyone was buying with real money, this provides a certain level of faith in the system. It also made it very appealing because unlike the regular financial system that has debt and risk everywhere, there was no debt to hold the currency back. It also meant that corporate issues such and bankruptcies were not possible, removing the risk of default on company debt from the equation.
How High Can Bitcoin Prices Go?
For this reason, there are many evangelists that make wild predictions of future prices. One such evangelist, American Trace Mayer, has suggested many very high numbers for the future, from $10,000 per BTC all the way up to $2.8m per BTC5. It seems difficult now to imagine such a price, but a few years ago, when one coin was valued at under a dollar, it was difficult to imagine a price of US$1,000 each, but that came and went so who knows…?
Within the alt coin community there is an oft used saying, “to the moon!“, meaning that there is no upper price limit and that they are hoping for very big numbers in the future. What is a Bitcoin worth to these guys? Who knows, but you cannot fault their ambition!
Can Bitcoins Be Manipulated In Price?
In some respects, it could be argued that all those hoarded coins mentioned above are a form of manipulation because they limit the supply of coins to the market.
There have certainly been some examples of people trying to manipulate the price by buying or selling in very large quantities. Typically, they seem to have a short-term impact on price, but limited lasting impact. There were claims of heavy sustained buying preceeding the Mt Gox collapse and the price increased very substantially in that period. However, the price is much harder to control than physical assets with more developed markets. For example, there are many times more futures contracts in existence for both gold and silver than there is actual gold or silver. For now, the price per BTC is not influenced in this way.
Can Bitcoins Be Faked Or Forged?
The blockchain and it’s decentralized nature provides most of the trust that the system needs. Every time new coins are created, they are provided as a reward for updating and authenticating the latest transactions. Since there are miners in a number of countries, mainly with very large operations, it is highly unlikely that fake or forged transactions can be processed through the system. The system prevents double spending as it verifies transactions. In contrast, there is a constant battle between governments and criminals trying to forge bank notes.
Can Bitcoin Become A Global Currency?
This will take a great deal of time, but it is possible, yes. It may be that it can become the reserve currency for the population of the world, though it is less likely to become the reserve currency for a government. However, in 2015 a paper was published by academics suggesting that it might be appropriate for the government of Barbados to hold a small percentage of their reserves in BTC. The paper suggested that perhaps 5% should be the maximum holding. However, if a number of governments decided to buy and hold, the size of their holdings (and the purchases necessary) would be incredibly bullish for the long-term viability and price.
Can Bitcoin Replace Money?
Probably not. One of the key roles of a functioning government is to maintain control over the ability to tax, borrow and spend money on behalf of it’s citizens. The ongoing eurozone crisis shows just what problems can be caused when a country gives up these rights. The likelyhood of any government giving up these rights and replacing them with a decentralized currency that it has literally no control over would seem to be very unlikely.
Why Is The Price Of Bitcoin So Volatile?
Since the BTC price is based so clearly around trust and supply and demand, there will always be volatility. There can be many reasons for price swings, but they almost always revolve around one of those three issues. If an economy is imploding somewhere, people try to preserve their wealth by placing money into an international environment. It speaks volumes that people trust their government less than they trust BTC!
What is clear is that there are some very wild swings in price on all of the alt coins. There are many reasons for these, but as long as the price jumps around as much as it has, it will not be easy for normal people to trust in the currencies and buy and sell goods. That is a problem that needs to be solved.
It is worth noting that there are usually different prices quoted on each exchange. For example, while Mt Gox was imploding, the price to buy was several times cheaper than elsewhere, reflecting the higher levels of risk in a purchase.
You should also realise that the price to buy or sell via an exchange changes minute by minute and the market is 24 hours per day and global. If things move fast, you cannot expect the market to close and things to quieten down. This certainly offers a high octane opportunity for trading.
Will Bitcoin Fail?
As time passes and the combination of more users, more transactions and more infrastructure continues to grow, it seems less and less likely that Bitcoin will fail. There are a number of alt coins that are in the wilderness in comparison and are quite likely to fail, BTC is not one of them. This growing useage and trust reduces the risks which increases trust and brings more and more people and businesses in, helping to squeeze supply and demand further.
There are issues that come with scale though. There are technical limits to how many transactions (information here) can be processed per second. In theory this sounds fair, but when it is compared with other global transaction systems – such as VISA – the number is incredibly low. This is one of the issues that the second major crypto currency, Litecoin, has had fixed. The development community all seem to agree that changes like these can be made, they just seem to disagree on what is the best way to do it. Either way, solutions are possible to BTCs main flaws, it will just take time and effort to implement them.
Has Bitcoin Peaked In Value? Can It Rise Higher?
I hope that the explanations above make a good case that there is a bright future. It would not take many new big developments for the price to rise dramatically, but equally, one or two big scandals could undermine the trust that has been built up in the system. However, the pace of development and change is so fast that it is literally impossible to imagine what could come in the next 10 years or more. In a longer time frame like that, the price could concievably be much, much higher than anything we can realistically contemplate today.
What Is A Bitcoin Worth: My Opinion?
It seems to me that Bitcoin is likely to take the role of gold in the crypto world. Gold was one of the earliest currencies and over time has been transformed from day to day use into a long-term store of wealth. Silver, took over for a time and that too has become a store of wealth, though it also has many more industrial uses. Then other (more easy to manipulate) national currencies came to prominence.
I wonder whether Bitcoin is the gold and Litecoin the silver of the alt coin world and one of the others will gradually become the de facto online currency for trade. Therefore, when it comes to what is a Bitcoin worth, only time will tell…
What does seem clear is that week by week, month by month, the likelyhood of failure is receeding and that means that the long-term viability is rising and therefore, so should the price. To be incredibly simplistic, there are more than 7 billion people on earth and if BTC continues it’s march towards total dominance in the crypto currency world, 21 million does not divide easily between 7 billion. Those supply and demand numbers look very good!