What determines the price of Bitcoin?
Bitcoin has lost over 50% of its
value in less than six months. Shortly before Christmas, each token was trading
at over $ 19,000. Today it is worth a little over $ 8,400. Bitcoin investors
predict a meteoric rise that will recommence any day now. However, Bitcoin has
refused to cooperate, by staying stubbornly stuck below 10,000 for the last two
months.
According to Forbes, the
"labor theory of value" essentially says that the price of a
good or service is determined by the work required to produce it. But, other schools
of economics say that the value of a good or service is whatever someone will
pay for it.
Moreover, if the producer values
the effort more highly than what the market will pay, they will stop
producing it. So if prices fall, therefore, marginal producers tend to drop
out. But as time goes by, more and more producers drop out until prices rise
enough for the market to clear.
Something similar happens when
Bitcoin falls: marginal miners drop out, as the cost of mining bitcoins begins
to exceed the rewards. However, Bitcoin has an automatic adjustment mechanism.
The algorithm puzzles that miners must solve become more difficult when
Bitcoin’s price rises and less difficult when the price falls.
Another important aspect, writes
Frances Coppola for Forbes, is that the real job of miners is not Bitcoin
production, but transaction verification. Without transaction verification,
bitcoins cannot be bought, cannot be sold, cannot be spent, cannot be earned.
If mining ceased, existing bitcoins would become immovable, and an immovable
asset is worthless.
What determines the value of
Bitcoin is whether people are willing to transact using it. That includes
buying and selling bitcoins.
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