Bitcoin's price fluctuates dramatically. One day, it's up 20 percent; the next, it's down 15. For investors and traders, this volatility presents great opportunities. It can also be stressful and confusing, especially when figuring out why Bitcoin's price is changing in the first place. Understanding what makes Bitcoin valuable and how to assess its worth can help provide clarity when its price changes. This article will cover the key factors contributing to Bitcoin's value and offer practical methods, including bitcoin supply and demand metrics, for evaluating its worth in a rapidly evolving market.
Bitcoin Magazine Pro’s Bitcoin analysis is a valuable tool for helping readers achieve their objectives, such as understanding the key factors contributing to Bitcoin's value and learning practical methods to assess its worth in a rapidly evolving market.
Is Bitcoin a Passing Fad?
When Bitcoin emerged, many saw it as a fad, a silly digital game for nerds, a bubble that would quickly pop. They dismissed its early fans as fanatics. Then came the inevitable crash, which, to the skeptics, confirmed their worst fears. But here we are again, at an all-time high of just over $85,000, with many serious investors and traditional economists jumping on the bandwagon.
Bitcoin has little in common today with the trendy bubble stocks that have bombed since January 2022. Bitcoin is carving its path and has shown resilience in the face of a wary market. It’s highly unusual for an asset to burst and recover to reach new heights so quickly when it comes to bubbles. This remarkable feat suggests that something real and sustainable is going on.
Bitcoin's Volatility Is Dropping
Bitcoin's comeback is also remarkable for defying the general shape of the current bull market, which is heavily concentrated in the big tech stocks. Investors have taken the tech heavyweights seriously, perhaps even more so now that they are seen as the giants most likely to dominate the future of artificial intelligence. Bitcoin gets no boost from AI mania. Sceptics wondered if Bitcoin could ever be taken seriously while its price swung wildly.
According to Bloomberg, its volatility has been dropping sharply, and it is at historic lows nearly five times less volatile than at the dizzy highs of the past decade. It is, though, still less safe as a currency than the dollar (seven times less volatile) or as an investment than gold (nearly four times less volatile).
What Makes Bitcoin Valuable? Supply and Demand
Trends favor the bulls. They had said that the inherent limits on its supply would prop up Bitcoin. The output of Bitcoin “mines” halves every four years, with the last cut coming in April. That is a big driver of the current rally. Many big institutions now see BTC as a legitimate investment. In recent years, they have increased their holdings in the strong double digits at an average rate.
In January, following approval by the United States Securities and Exchange Commission, 11 of them opened new bitcoin exchange-traded funds (ETFs) to the general public. That market is on course to grow from US$50 billion now to US$300 billion in 2025. Bitcoin increasingly looks more like an asset with staying power than a fad. Froth is a feature of any runaway bull market, but for now, the so-called fanatics, not the skeptics, have good reason to celebrate. An old Wall Street is saying for moments like this: Only the fools are dancing, but the bigger fools are watching.
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What Makes Bitcoin Valuable?
Bitcoin has no intrinsic value, so what gives it value? BTC has increased in popularity and price in recent years, and many people have begun to wonder what, if anything, underpins Bitcoin’s worth.
What is Intrinsic Value?
The intrinsic value of a commodity is the value that a product possesses in itself. It does not require an additional source to provide it with a value. For example, Sweetness is an intrinsic value of sugar. Every commodity earns its value if there is a price that people would pay to obtain it. We accept any fiat currency in exchange for goods or services as we understand that the fiat currency can be traded again to obtain other goods or services.
Certain currencies backed by precious metals like gold and silver have intrinsic value. But today, most global currencies are fiat currencies. A commodity needs to be exchangeable for a similar value to be valuable. The commodity must also be able to hold or store this value to be traded in the future. If the commodity in place is limited in supply, then its value increases over time with demand.
Bitcoin Is More Than Gold or Silver
Bitcoin is also not backed by gold or silver, so it has no intrinsic value. The value of any currency comes from the backing of the state and the people's trust in the government. Hence, for any money to be established as an exchange of value within a network, the network must trust it regardless of who (or what) is backing it.
This is exactly where Bitcoin is gaining its value. The trust millions of people have imparted Bitcoin in a completely trustless environment decides its value. Millions of miners and traders are considered the Bitcoin network participants who trust it and decide its price on the sole principle of its demand and supply.
Bitcoin Has Utility and Scarcity
Understanding the shift the culture of electronic modes of payments and digital currencies brings is pivotal for a user to understand this entire ecosystem.
Electronic Payment
Uses less traditional currency and direct value exchange between two parties through a digital medium. We have witnessed a sudden shift to electronic payment methods in recent years due to their ease, transparency, and accuracy. It is easier to find the source. With the introduction of payment apps or wallet apps like:
- Paytm
- Google Pay
- PhonePe, Etc.
Cashless Transactions
Have gained massive traction. This mode of payment is one example of The Network Effect, which in economics suggests that the value of a good increases with the number of people utilizing it.
Bitcoin's Role in Revolutionizing Large and International Transactions
Though daily digital transactions are swift, the same cannot be said about large or overseas transactions. Such transactions are time-consuming and subject to a highly volatile exchange rate. Bitcoin solves these problems with its decentralized infrastructure, making direct money transfers:
- Quick
- Traceable
- Transparent
- Immutable
Following the network effect principles, BTC will gain more value as adoption increases. A single phone is useless as no calls can be made through it. But as soon as the number of phones increases, the value increases exponentially. With Bitcoin, adoption is the factor that will play the leading role in adding value to it.
Utility and Scarcity
Beyond the layman’s narrative, economics defines two essential characteristics for a commodity to have value. Scarcity means a finite supply of goods or services. Bitcoin is a limited currency, meaning a finite number is available. Bitcoin has set a cap of 21 Million Bitcoins.
Analysts note that Bitcoin's scarcity feature increases its desirability over other assets, including gold. Although the supply of gold is limited, we aren’t sure of the total amount available. A sudden influx of supply will crash prices and may hurt overall markets. A similar Gold Rush isn’t possible with Bitcoin, as no hidden treasure will ever be ‘discovered.’
Bitcoin Is Digital Money
Considering the cashless mode and other factors that make up a fiat currency, let us consider Bitcoin. As we know, Bitcoin doesn’t have a solid counterpart. It is purely digital. It automatically offers all the benefits of Digital transactions, and the time taken to complete the transaction is far less.
Bitcoin comes with the security of Blockchain, making it difficult to counterfeit or play around with. Another point is that Bitcoin has a cap of 21 million units, of which 17.3 million are in circulation. Once the set number is achieved, the program to create or mine Bitcoin will stop. This makes Bitcoin accountable in itself. As mentioned above, Bitcoin has value in itself. It is free from the worry of finding an appropriate store of the value inherently in Fiat money.
Bitcoin as a Payment Solution: Reducing Costs and Transaction Time
A currency's utility as a mode of payment is due to two key factors:
- Transaction Costs
- Transaction Time
The cost to transfer Bitcoin is minimal, as technically, only two parties are involved. It’s more like a digital cash transaction, significantly reducing the overall transaction cost. With the added security layer Blockchain provides, this is perhaps the safest way to transfer value digitally.
Transaction Time, or time to realize the payment in the seller’s account, is a few minutes at max with BTC. Compare this with days when traditional fiat currencies were still in use. A global e-commerce major like Amazon, which has millions of daily transactions, cannot afford such high costs and cash-flow challenges. Many companies have started collecting payments using Bitcoin.
Bitcoin's Scarcity Is Built In
When designing Bitcoin, Nakamoto established the proof-of-work mechanism. BTC is "mined" by users completing difficult "tasks" such as complex mathematical equations. The process uses vast computational power, and the miners are rewarded with BTC for contributing to the network.
The mining process ensured that Bitcoin wouldn't have been perceived as worthless upon its launch, holding back supply to increase interest. The steady release of BTC as mining rewards means that the asset has an inflation-resistant framework that is less prevalent in the world of fiat currency due to the ability of central banks to produce more of a currency as and when they desire. Because of this capped supply, it may be beneficial for investors to view Bitcoin as more akin to gold than traditional currency. Due to its finite supply and the complexity of its mining process, many market analysts have likened BTC to "digital gold" with more functionality.
Bitcoin's Scarcity: The Impact of Lost and Dormant Coins on Supply
Bitcoin's scarcity has inadvertently increased due to the loss of BTC over the years. According to a blockchain analytics firm Chainalysis report, between 2.78 and 3.79 million BTC have been lost forever, representing 23% of the total Bitcoins in circulation today.
We must also consider Satoshi Nakamoto's BTC wallets, whose estimates suggest up to 1.1 million BTC has been dormant for over a decade. While this has led to questions about the fate of the Bitcoin founder, it may be that these fortunes will never be recovered. According to Cane Island Digital Research estimates, a maximum of just 14 million BTC will ever circulate because of how frequently coins are lost in inaccessible wallets or burned.
What Is Bitcoin Halving? How Does Bitcoin Halving Affect Price?
At the core of Bitcoin's meticulously calculated scarcity are its pre-programmed "halving" events. Bitcoin's halving, or "halving," occurs approximately every four years once 210,000 blocks are mined on its blockchain network.
While a halving event may sound complex, it's a relatively straightforward mechanism. Simply put, once every 210,000 blocks are mined, the volume of BTC awarded to miners will fall by half. When Bitcoin launched in 2009, miners were awarded 50 BTC for every block they created, and this was halved to 25 BTC by 2012. After three further halving events, Bitcoin's block reward stands at 6.25 BTC, which is set to fall to 3.125 BTC in 2024's much anticipated halving event.
Bitcoin Halving: How Supply Cuts Drive Scarcity and Influence Price Rallies
Bitcoin's halving events actively make the coin more scarce by continuously halving its supply. While there was a steady flow of BTC entering miners' wallets in 2009, by 2024, just 6.75% of the block rewards for miners were entering circulation. This actively creates fewer BTC available to cater to market demand and thus fewer BTC accessible for new investors.
There's also tangible evidence that these halving events pump the price of Bitcoin. Although there are few recognizable trends in the Bitcoin world due to high market volatility, Bitcoin's stock-to-flow model shows a relatively consistent pattern of asset rallying in the months following a halving event. As we can see from Bitcoin's stock-to-flow model below, the asset's value has grown to reach new all-time highs within 12 to 18 months following a halving event.
Assured Scarcity and Volatility
Bitcoin's halving events are a trustworthy trend amidst a landscape prone to significant volatility. This means that investors should always appreciate that no recurring trend is guaranteed to increase the value of an asset, even if it's been shown to do so in the past. By following Bitcoin's halving events and other factors like market sentiment, it may be possible that BTC's digital gold becomes a seamless store of wealth.
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5 Ways to Value Bitcoin's Real Worth
1. Bitcoin as Digital Gold: Scarcity and Value
Bitcoin analysts frequently compare Bitcoin to precious metals like gold and silver. Both are finite resources with stable supply schedules. Whereas Bitcoin lives on the blockchain, gold and silver exist in the physical realm. Like gold and silver, bitcoin has intrinsic value as a raw material, and both can be used in industrial applications. Perhaps the most important similarity is that as the world’s economy becomes more digitized, bitcoin’s value as a “digital gold” will only grow.
Analysts use the stock-to-flow ratio (S2F) to measure the relative scarcity of finite commodities like gold and silver. You can do the same for bitcoin. The S2F splits the supply of a commodity into two buckets:
- Stock: the total supply that’s been mined already.
- Flow: the amount of new supply mined last year.
To get the S2F, you just divide the stock by the flow. That value represents the years it would take to mine the current supply. In other words, a higher S2F implies the asset is scarcer and more valuable. Mining data from blockchain.com puts Bitcoin’s current S2F at 57 years. For example, data from the World Gold Council gives us a S2F of 58 years for gold. In S2F terms, gold is slightly scarcer than Bitcoin right now.
But that will soon change. The number of new coins awarded to Bitcoin miners is cut in half every four years. In 2024, it’ll go from 6.25 per block to 3.125. That will reduce the yearly flow, drastically increasing Bitcoin’s S2F. As more time passes, though, bitcoin’s S2F will increase exponentially. At some point, it’ll be so high that using the model to compare Bitcoin’s scarcity with that of other assets won't make sense.
2. Bitcoin as a Payments Network: Transaction Volume as Earnings Power
Bitcoin recorded roughly $2 trillion worth of transactions in 2021, while PayPal facilitated $1.2 trillion worth of payments. If you consider Bitcoin a payments network, its transaction volume is a proxy for its earnings power. That’s the theory behind the network-value-to-transactions ratio (NVT). Using logic similar to stocks' price-to-earnings (P/E) ratio, the NVT divides Bitcoin’s market capitalization by its daily transaction volume.
As with the P/E ratio, a lower NVT suggests the investment is a bargain. That’s because the Bitcoin price is low relative to the number of transactions on the network. But as the chart below shows, that doesn’t always mean it’s time to buy Bitcoin. It’s usually better to focus on the ratio trend over time.
3. Bitcoin as a Growth Stock: User Acquisition and Value
Bitcoin is not just an innovative technology or an alternative currency. It’s also a growth stock.
Facebook grew its user base from one million users in 2004 to just under three billion today, and its valuation has grown by orders of magnitude at that time. With growth stocks, user acquisition boosts value, and you can apply that logic to Bitcoin.
The chart below shows how the number of active Bitcoin wallets that address those involved in successful transactions has risen since 2009. The growth of active addresses shows that more people have been using the Bitcoin network, which has boosted its value over time. You’ll want to see this trend continue for Bitcoin's value to keep growing.
4. Bitcoin Hash Rate: The Security Power of Miners
The amount of computing power that bitcoin miners contribute to the network at a given time is called the hash rate, and this provides useful insight into bitcoin’s value. Higher hash rates mean more competition among Bitcoin miners.
That makes bitcoin more secure and robust, which adds value to the network. Bitcoin’s hash rate usually rises with its price: a higher price creates a greater incentive for miners to mine. With this in mind, you can think of bitcoin as cheap when its hash rate is relatively high compared to its price.
5. Market-Value-to-Realized-Value Ratio (MVRV): Wallet Data and the Bitcoin Network
The MVRV method uses on-chain wallet data to estimate the “realized value” of the Bitcoin network, which is the estimated acquisition cost of all existing bitcoins. Assume Bob bought one bitcoin for $6,000 in 2018. If that Bitcoin remains in the same wallet, we can assume he never sold it. So even if we’d never met Bob, we could infer from the blockchain that the cost of his Bitcoin was $6,000. And with that information, we could also say the realized value of the Bitcoin network increased by $6,000. But what if Bob moved his Bitcoin to another wallet in 2020, when the Bitcoin price was $10,000? Perhaps he sold it to Alice for that amount.
At this point, the coin's realized value becomes $10,000, the estimated price someone last paid. Of course, Bob might’ve just moved his Bitcoin to another wallet. In this case, the realized value would still change according to the Bitcoin price when he moved it, so the realized value is only the best estimation of acquisition cost.
The MVRV Method Compares Two Values:
- Market value: bitcoin’s price multiplied by its available supply.
- Realized value: the estimated cost of every bitcoin in existence.
Using the MVRV Ratio and On-Chain Data to Assess Bitcoin's Valuation
To get the MVRV ratio, you divide the market value by the realized value. The chart below shows large upward spikes in the MVRV have coincided with market tops, while values less than one have presented long-term buying opportunities. The blockchain leaves you many clues on how to value Bitcoin.
While only some possible methods are covered here, the five should give you some idea of the power of on-chain data. Regardless of your method, analyzing your valuation against Bitcoin's current price or market capitalization is crucial. With stocks and bitcoin alike, buying good fundamentals at discounted prices is a recipe for long-term success.
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