Should you buy Bitcoin? First, know what it’s worth.
In the past few months, we’ve received questions like “Should I buy Bitcoin?”, “How much Bitcoin should I buy?” and “Can I buy it with my bank account, Cash App or Venmo?” But the real question usually is – “Is it worth it?”
People want to buy Bitcoin for several reasons. One of them is because the cryptocurrency is up by 250% in one year. But is that the only thing that determines the cryptocurrency’s worth? In this post, we break down what determines the cryptocurrency’s worth. More importantly, we answer whether buying Bitcoin is worth it, or not.
Before we get to the ‘worth’ of Bitcoin, let’s understand what we mean by this.
‘Worth’ doesn’t simply mean value measured in dollars. This also does not mean price change from one point to the other. ‘Worth’ should be looked at in a few ways. We’ll look at Bitcoin worth, based on.
The Utility of Bitcoin
Every asset has utility. Bitcoin is no different. But its utility is more diverse than any other asset. What’s the main utility of everyday assets?
Cash has liquidity, it can be used immediately to purchase a whole range of things. Gold, to some, has real-value and to others is a hedge. Equity (in the form of stocks or funds) has ownership attached to companies. Debt (in the form of bonds or funds) has the safety of interest and principal repayment. Bitcoin has a little bit of everything.
Bitcoin is defined by two main principles – as a medium of exchange and/or a store of value. These two principles can be used to compare it with cash and gold.
Medium Of Exchange
A medium of exchange refers to an asset that can be used for payment. Cash in dollars, euros, yen, or rupees are examples of assets used for payment. Payment can mean between peers (P2P), between businesses (B2B), and between businesses and their consumers (B2B).
Bitcoin’s main benefit lies in P2P payments. It can be used to transfer value from one person to another. These people can be located in different countries, and have two separate bank accounts. Since Bitcoin relies on its own technology (to wire-transfer) and separate wallets (for custody), third parties like banks and foreign exchange services. Cross-currency transactions are also possible.
On a B2B level, some companies like Microsoft for video games, Expedia for hotel payments, Overstock for furniture can be paid for with Bitcoin. However, these platforms require a third party custody provider like an exchange.
Store Of Value
A store of value refers to an asset that can retain its value over time. Gold is an example of this kind of asset. It is seen as an asset that can be used as a ‘safe-haven’ during a financial crisis. Bitcoin is also seen as such an asset. In the aftermath of the Covid-19 led financial crash in March 2020, many new investors flocked to the cryptocurrency.
Before Bitcoin’s price crashed by 50% in 24 hours in March 2020, there were less than 290,000 new BTC addresses created. That number has tripled in January 2021.
Source: Glassnode studio
The Price of Bitcoin
Since we’re discussing ‘worth,’ we need to look at how Bitcoin is priced. Like any other asset in the world, Bitcoin is priced based on supply and demand. The important thing to remember in this equation is its supply is limited but its demand isn’t.
Only 21 million Bitcoin will ever exist. This is not an arbitrary number. This is a number created and encoded into the blockchain by Satoshi Nakamoto, the pseudonym for Bitcoin’s creator or creators. The last cryptocurrency will be mined (or created) in the year 2140. But the current supply and its supply schedule is fixed.
At the time of writing, 18.6 million of the 21 million (or 88%) Bitcoin have been mined since 2008. Bitcoin’s supply works on a pre-decided (or encoded) supply schedule.
Satoshi Nakamoto encoded into Bitcoin decreasing supply. In 2008, when a single block (of BTC transactions) was mined, it would reward the miner with 50 BTC. This reward decreases with the production of every 210,000 blocks.
This happens roughly every four years. Since the rewards decrease by 50% every year, this event is called the ‘Bitcoin halving.’
- In 2008, the reward was 50 BTC. (420,000th block)
- In 2012, it dropped to 25 BTC. (630,000th block)
- In 2016, it dropped to 12.5 BTC. (840,000 block)
- In 2020, it dropped to 6.25 BTC. (1,260,000 block)
This will continue till the year 2140 when all Bitcoin left to be mined is mined. This is the supply of Bitcoin.
On the other hand, the demand for Bitcoin is measured by currency, like dollars. This currency is unlimited. The central bank printing the currency can print an unlimited amount. Since the demand for Bitcoin (in dollars) is unlimited, and the supply is limited – this can affect its price in a positive manner.
The price of Bitcoin is primarily determined by supply and demand. However, since it is seen as an investment by many two other criteria determine its price. Firstly, hedging – since the cryptocurrency is used to hedge (regardless of its supply) against uncertainty. Secondly, in diversification, many financial companies are diversifying into Bitcoin. But this diversification is limited to Bitcoin derivative contracts on a cash-settled basis. Further, these companies are not taking custody of the assets themselves. They are either relying on contracts (for derivatives) or third parties.
Hedging and diversification do not fit the supply and demand price discovery. But they affect the price nonetheless.
Is buying Bitcoin worth it?
Utility and price are what drive Bitcoin’s worth. Is it a store of value, medium of exchange, or some other kind of asset for you? What do you value most about its price, is it the limited supply or the unlimited demand. These are essential things to look at before determining its worth.
Lastly, ‘worth’ is personal. Personal to you as a person, your portfolio, and your goals. So, what do you think, is Bitcoin worth it?
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