Unlike traditional currencies, Bitcoin price is not backed by any physical asset such as gold or oil but rather formed by the balance of supply and demand. To put it simply the more people use BTC, the higher Bitcoin value will be.
Bitcoin supply and demand
Naturally, if a particular object, while being heavily demanded, becomes rare – its value starts to grow. The price of certain collectibles sometimes reaches millions of USD solely due to their rarity. Bitcoin economy is based on a similar principle. Bitcoin emission is controlled by the system and Bitcoin stock is limited. The total number of coins in circulation cannot exceed 21 million. However, Bitcoins can be lost or destroyed. Therefore the actual number can be less than 21 million, further helping the growth of Bitcoin value by making BTC more scarce.
Usefulness of Bitcoin
Even though we have established that Bitcoin has a limited supply and that Bitcoins are rare, it is still not enough to boost Bitcoin price on its own. Bitcoin has to be useful to create demand.
BTC builds its usefulness in a number of ways. From several points of view behaves it like gold, hence the nickname of Bitcoin – digital gold. For example, Bitcoin can be obtained by searching for new blocks, where a successful search is reworded with BTC. This process is called Bitcoin mining. Bitcoin is fungible in a sense that every Bitcoin is similar to the other, it can be divided into fractions with Satoshi and can be verified in the blockchain.
On top of that Bitcoin has a lot of potential as a technology. It’s a decentralized currency that can speed up financial transactions, significantly reduce if not eliminate fraud in specific industries and even reduce operational costs. All added together Bitcoin is a technology that can revolutionize the financial sector, which is the primary factor that provides the high level of demand.
The most popular places to buy and sell Bitcoins are online exchanges. Each exchange might have it’s own Bitcoin rate that can fluctuate in the hundreds of USD. Several online Bitcoin price charts help keep track of the currencies value.