How Is Bitcoin Valued
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina. He is a CFP, registered investment advisor, and he owns his own financial advisory firm. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Bitcoin is a major digital currency or cryptocurrency. Unlike the dollar, euro, pound, yen, peso, and other government-backed currencies, cryptocurrencies are not officially supported by any central bank or government. Instead, the currency trades in an open marketplace similar to the stock market, where buyers and sellers can exchange their local currency for bitcoin or vice versa.
While some cryptocurrency exchanges host their own trading platforms and prices may vary slightly, the overall market price of bitcoin is simply the latest trade price where a buyer and seller agreed on a price. However, bitcoin enthusiasts often say that the intrinsic value of bitcoin is in the six-figure range, while skeptics say it could be worth zero. Keep reading to find out how bitcoins price is set and how you can get in on the market action.
Factors That Could Impact Bitcoins Price
Bitcoin is a unique asset that is relatively new, which is why the future is generally considered uncertain. While its about a decade old, its still a Wild West type of frontier in many ways, with future regulations uncertain. While its possible the value of bitcoin could surpass $100,000, it could also go to zero.
The biggest single factor that could impact bitcoins price is likely government action. As occurred in China in July 2021, the United States or other governments could implement new laws or regulations that severely limit bitcoin or even make it illegal.
When it comes to cryptocurrency regulation, The Federal Trade Commission and The Commodity Futures Trading Association are two major government organizations to watch. Because cryptocurrency accounts are not backed by a government, there are risks involved, in that these types of payments do not come with the same legal or privacy protections as the U.S. dollar.
On the other side, however, a single investor or fund could drive bitcoin prices up. Tesla CEO Elon Musks Tweets, for example, tend to have an impact on crypto market prices. Catherine Wood, CEO of Ark Invest, is another major Bitcoin advocate who may help lead the market upward. In addition, early investors who built up a significant bitcoin holding, sometimes known as bitcoin whales, can swing the markets by entering a large transaction. There are dedicated places to track whale transactions online, such as the .
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Business Income Vs Capital Gain
Disposing of a cryptocurrency results in either a business transaction where 100% of the gain or loss is taxable/deductible or a capital transaction where 50% of the gain or loss is taxable/deductible.
The tax treatment will depend on your intentions and whether it was likely you were carrying on a business. The taxation of each individual or business will depend on each specific circumstance.
The following are common signs that you may be carrying on a business:
You carry on activity for commercial reasons and in a commercially viable way.
You undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory.
You promote a product or service.
You show that you intend to make a profit, even if you are unlikely to do so in the short term.
Frequently, businesses are carried on with regular transactions to buy inventory and sell it for a profit which results in business income being generated. When transactions are done infrequently or even just once, they may be considered an adventure or concern in the nature of trade which results in income being fully taxed as business income.
The following need to be considered when determining if a transaction or transactions are an adventure or concern in the nature of trade:
whether the taxpayer dealt with the property acquired by him in the same way as a dealer in such property ordinarily would deal with it
Why Do We See So Much Fluctuation In Cryptocurrency Prices
It& rsquo s still a nascent market.
The cryptocurrency market is still considered very new and, beyond hearing the term & ldquo cryptocurrency,& rdquo most people are still very much unfamiliar with the industry.
Nascent markets have a number of qualities that make them inherently volatile.
Limited liquidity exists within the market if you compare it to more established markets like traditional economies, including the foreign exchange market. To put it into perspective, the total value of all the money in the world is more than $90 trillion, while the total cryptocurrency market cap is hovering around $250 billion& mdash a 36,000 percent difference.
Daily cryptocurrency trading volumes are around the $14 billion mark, while daily forex trades are closer to $5 trillion. The spread & mdash the difference between the buy and sell price & mdash on foreign currency trades will be a few pennies at the most, while spreads on cryptocurrency trades can be as high as a few dollars.
All this points to a very thin market that naturally moves very quickly and thus increases the volatility of cryptocurrency prices.
Finally, price manipulation can be rife in nascent markets. Central exchanges control most of the flow of cryptocurrencies, giving them a lot of incentive to grow their revenue by artificially manipulating crypto prices. One way they can do this is by manipulating the price feeds displayed on exchanges, prompting traders to either buy or sell.
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What Makes Bitcoin Prices Go Up And Down
Bitcoin’s price fluctuates for various reasons, including media coverage, speculation, and availability. With negative press, some bitcoin owners panic and sell their shares, driving down the price. Vice versa with positive press. Also, when the volume of bitcoin sold on the market increases, the price decreases. As more institutions adopt bitcoin as an investment and medium of exchange, its price increases.
Also, many people have eroded confidence in their fiat currency and seek alternative sources to store their money. Because bitcoin is decentralized and unregulated, it is a favorable alternative, thus driving up its price.
Investing in cryptocurrencies and other Initial Coin Offerings is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own bitcoin.
What Is An Intrinsic Value
An intrinsic value of a commodity is a value that a product possesses in itself. It does not require an additional source to provide it with a value. Eg: Sweetness is an intrinsic value of sugar. Every commodity earns its value if there is a price that people would pay to obtain it. Today, we accept any fiat currency in exchange for goods or services as we understand that in turn, the fiat currency can be traded again to obtain other goods or services.
Well, certain currencies that are backed by precious metals like gold and silver have an intrinsic value. But, today most of the global currencies are Fiat Currencies. A commodity to be valuable hence needs to be exchangeable for a similar value. The commodity also must be able to hold or store this value so as to be traded in the future. Add to that, if the commodity in place is limited in supply then its value increases over time with demand.
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Top 4 Reasons Why Bitcoin Can Influence The Entire Crypto Market
If you have been following the cryptocurrency market, you might have noticed by now that every time Bitcoins price goes down, alternative cryptocurrency prices follow. The opposite is equally true when the price of bitcoin rallies, we expect altcoins to go up in price shortly after.
But why does this happen? What makes Bitcoin so important that an entire industry follows it so closely? If we made the parallel to stock markets, it would be ludicrous to think that all of the Nasdaq would crash just because of Microsoft stocks, for instance.
B Utility And Difficulty Level
Utility is a significant factor in the development, advancement and the fall of any asset and cryptocurrency isnt exempted from this reality. In the event that it isnt utilized and appropriately used, it would have almost no apparent worth. For Bitcoin, the utility is high, its abnormal state of trouble and vitality utilization gives it a sensible cost and all things considered is reasonable for the venture and changes in this utility level can make the cost vary.
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What Determines The Value Of A Cryptocurrency
The technology behind a cryptocurrency plays a very big role. Decentralised currencies are resistant to censorship but even more so, it is nearly impossible to just shut them down.
Another important part of the technology is its safety. The digital nature of cryptocurrencies implies that there could be bugs in the coding. For example, an ethereum-based smart contract for a democratic digital investment fund, the so-called DAO, had a bug that was ultimately exploited by a hacker who stole more than $30M worth of ether. To fix this issue, a change in the ether blockchain was discussed. Some in the Ethereum community agreed that it would fix the problem, but others didnt want to change the code as a matter of principle and were afraid it would affect the credibility of ether. Ethereum was then split into two versions: Ethereum and Ethereum Classic . Both can still be traded and everyone who owned ether at that point received a version of the new one and the classic one. Such an event is called fork and can have a big impact on the price if there is no consensus between the miners and other participants in the network.
How Do Cryptocurrency Prices Compare To Fiat Currencies
Neither is backed by a commodity like gold or anything with an underlying value.
The biggest difference between cryptocurrency values and fiat money is that fiat currencies are backed by central governments and declared as legal tender. Its value is basically derived from the fact that the central government has stated that it has value and two parties in a transaction put their trust in that value.
Most countries today operate in a fiat currency system, where central banks and monetary reserves control the supply of money and, as such, indirectly control inflation.
Cryptocurrencies, on the other hand, are not controlled by a central government or authority, and most regions do not accept them as legal tender. Cryptocurrencies will also generally have a fixed supply and, therefore, the devaluation of cryptocurrencies through inflation is mostly nonexistent.
Other than that, both fiat and cryptocurrency values are supported by similar characteristics. Both methods can be used as a medium of exchange to buy products and services, and both methods have a relative store of value.
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A Guide To The Economics Of Bitcoin
Bitcoins price has been on a wild ride since its inception. 2017 alone saw massive gains, starting the year at under $1,000 and, at its peak, breaking $19,000, according to industry site CoinDesk. Then we saw a deep fall in 2018 and stability in 2019. What drives its value and why does a significant market still invests heavily in it is a question non-believers often ponder. This piece tries to address this query and help us understand the value behind Bitcoin or any Cryptocurrency. We are looking at a time where the mode of payments are changing in a short span of time.
From e-wallets to payment applications, the ways one can trade have multiplied but for trading commodities, the number of innovations can be counted on fingertips. The value behind Bitcoin or any cryptocurrency is often less understood by the larger audience. This also comes from the fact that people dont understand the value behind a FIAT currency. As the popularity around Bitcoin and other cryptocurrencies rises and there is a rise and fall in their pricing, many have this question: From where does Bitcoin get its value?
Cryptocurrency Price Follows The Simple Economics Of Demand And Supply But There Are Some Other Factors As Well
Cryptocurrencies are not regulated by governments or any single entity they are decentralised
- All cryptocurrency trades automatically get entered into a public ledger
- Node count measures how many active wallets exist on the network
- To know about a cryptocurrency, a person can visit an online exchange
Cryptocurrencies have been available to the public for nearly a decade now, but their popularity is a relatively new phenomenon. A lot of people have now started investing in one of the many digital coins available today. The process of creating these coins called Mining is limited to the geeks, who work on powerful computers to solve complex mathematical equations to create virtual currencies like Bitcoin, the oldest and most popular of them all. Based on the idea of decentralisation, the blockchain technology behind these coins plays an important role in sustaining them and making them secure.
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Taxation Of Cryptocurrency In Canada
Cryptocurrency is increasing in popularity these days so more and more taxpayers will need to know what the tax implications are. The tax treatment will depend on several factors, therefore it is important to keep detailed records of all cryptocurrency transactions in order to accurately file your taxes.
Lets take a look at when taxable events occur and how different types of transactions are taxed.
The Price Of Cryptocurrency
In the case of cryptocurrencies, academia has barely scratched the surface with respect to identifying the determinants of their prices. For example, studies by Cheah and Fry and Corbet et al. claim that Bitcoin has no intrinsic value and that its price has persistently exhibited bubble-like behaviour. Makarov and Schoar find that the prices of Bitcoin, Ethereum, and Ripple differ across exchanges for weeks. Outside of academia, the President of the United States recently tweeted that cryptocurrencies are based on thin air.1
In Bhambhwani et al. , we challenge the perception that cryptocurrency markets are simply plagued with bubbles and speculative trading by identifying two key blockchain measures that affect cryptocurrency prices. Specifically, theory suggests that the trustworthiness and the transaction benefits of a blockchain are important determinants of cryptocurrency values. Pagnotta and Buraschi link trustworthiness to the computing power devoted to the blockchain. Biais et al. link transaction benefits of a cryptocurrency to the size of its network.
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Determining Price Of Cryptocurrency
The most effective way the price of a cryptocurrency coin is determined is by its demand. Heavy demand from buyers will push the value of a digital coin upwards. Conversely, if a coin has a high token supply with little demand, then its value will drop. Other factors that influence the price of a crypto coin include the level of token utility i.e., how useful the token is. A difficult mining process would mean it is more difficult to increase the supply of the coin and cause upward pressure on the price when demand is high.
Why Is The Marginal Cost Of Production Important
The marginal cost of production is an economics concept that plays an important role in business management. It refers to the incremental cost of adding one more unit of production, such as producing one more product or delivering one more service to customers. It is generally associated with manufacturing businesses, although the concept can be applied to other types of businesses as well.
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Corporate Interest In Cryptocurrency
Then, 2019 came, and institutions started getting interested in the coins. Major players, like Facebook, Telegram, Apple, and Amazon. Even some banks such as JP Morgan hopped aboard the crypto express and announced their own coins.
alsoannounced its Libracoin recently, after months of the community speculations about the companys future plans.
As for JP Morgan, it revealed its JPM Coin, which, according to many, would not be an actual cryptocurrency. It wont be a decentralized coin, but rather a digital version of the money that the banks clients can deposit into the bank.
The applications are frankly quite endless anything where you have a distributed ledger which involves corporations or institutions can use this.
Umar Farooq, Head of J.P. Morgans Blockchain Projects
But even so, experts believe that the banks involvement might bring new users to the crypto world. Once they learn about cryptocurrencies, they will know that JPM Coin doesnt qualify as one and theyll likely ditch it for Bitcoin.