Pricing Bitcoin & Co. — Influences and the Parallels to Gold
Bitcoin and many other cryptocurrencies are currently experiencing strong increases in value and new all-time highs. Bitcoin’s price recently rose to almost $42,000, which corresponds to a growth of 350% since August 2020. Other cryptocurrencies like Ether also benefited greatly from the rise.
With such enormous increases, the first question for many is what the value of digital currencies like Bitcoin is actually tied to and what factors influence their prices. Even if one can’t quite pin down why exactly a cryptocurrency’s price rises or falls, one can still look at how its value is generally influenced.
The parallel of Bitcoin to gold
It’s no coincidence that Bitcoin is often dubbed “the new gold”, as characteristics that apply to gold also partially apply to Bitcoin.
Gold as a precious metal has always fascinated mankind. Its golden shine, rarity, and last but not least almost unbeatable durability are what make gold so desirable in our eyes. States use gold reserves to hedge their currencies against loss of value. Gold is precisely limited in its occurrence and that’s exactly the reason for its special value development.
Bitcoin follows the same principle, as a limited resource, it creates an increase in value as demand grows.
Gold as a commodity is scarce. The value increases gradually but steadily because new gold resources are only discovered sporadically and thus the amount of gold remains low compared to its high demand. Gold is further not released onto the market all at once, but the quantity is highly regulated. Under these conditions, its slow and steady price increase can be explained.
According to analyses, there are 171,200 tons of gold on earth. If one were to melt these amounts of gold into a large cube, its dimensions would be a height, width and depth of only 20.7 meters.
Bitcoin is programmed so that there will only ever be a maximum of 21 million Bitcoins. The gradual unlocking of new Bitcoins on average every 10 minutes, further limits the ‘creation’ of new Bitcoins. This can be compared to the aforementioned discoveries of gold veins that have been found gradually over the period of human history.
BITCOIN — The value is discovered by the markets
Bitcoin, a digital currency based on blockchain technology, can be used like any other currency to purchase goods, services, or as a digital store of value. Like gold, the price of Bitcoin is determined by supply and demand in the markets. The high price volatility of cryptocurrencies exists partly due to the still comparatively low market capitalization today, in the case of Bitcoin for example ~7% of the market capitalization of gold, and partly determined by the different perceptions of the inherent value of cryptocurrencies as a store of value and method of value transfer. The more people are willing to spend money on the limited amount, the higher the value, and vice versa.
The value of cryptocurrencies like Bitcoin also continues to be shaped in part by how the rest of the global economy develops. The monetary policies of the leading countries and their central banks play a crucial role. These can, for example, bring about inflation through newly printed and circulated money. Generally one can observe positive inflation, which means one receives less for the same quantity of money and it thus loses purchasing power.
Parallel to the developments of the global economy, an acyclical development of the value of Bitcoin is often observed. As an example, if the value of the dollar decreases, the value of cryptocurrencies usually increases. This likely is due to the fact that the demand for more stable-value assets such as gold or Bitcoin increases, when the Euro or Dollar loose purchasing power, since their price is ultimately measured against precisely these reserve currencies. However, it cannot be ruled out that the development of cryptocurrencies will decouple from the relation to the development of the global economy in the long run.
No less, the pandemic-related situation of the last few months has additionally driven the demand for digital payment methods and shown how alternative payment methods can be utilized and integrated into the economy.
In summary, a good is only worth as much as people are willing to pay for it. Like gold, Bitcoin is limited, its value discovered in the markets and is increasingly seen as a guaranteed value in uncertain times. The possibilities of being able to acquire and spend the cryptocurrency are thus further influences that should not be neglected.
The increasing use of cryptocurrencies as a means of payment in the economy additionally contributes on the one hand to their value, and on the other hand to their dissemination and general adoption. Online payment service provider PayPal, for example, has enabled the purchase, storage, and sale of cryptocurrencies in 2020. J.P. Morgan, the largest U.S. bank, has already been working on blockchain-based digital currency system projects for over four years. It has long been possible to pay with cryptocurrencies at well-known American-based corporations such as Microsoft, Starbucks, Subway, or Burger King, and in Europe at Expedia, Greenpeace, or the Latvian airline airBaltic as well.
In Austria, there are already more than 250 locations where one can purchase goods and services with cryptocurrencies on-site or online. Our Salamantex point-of-sale and webshop solutions also enable the straightforward integration of cryptocurrencies as means of payment for any business. We currently support Bitcoin as well as the other popular cryptocurrencies Ether, Litecoin, XRP, Stellar, and Dash.
How the value of cryptocurrencies is going to develop in the future, one can still only try to guess or attempt to derive from occurring events and development trends. The past has shown that increased acceptance and demand tends to cause a price upswing.