Many people have a hard time wrapping their heads around the concept of Bitcoin. The digital coins are not only a currency that allows users to buy and sell things without the interference of a third party, but they are also a kind of investment asset, one that rises and falls, sometimes at exceedingly unpredictable rates. For those at a loss when it comes to Bitcoin and its volatile value, the best way to think about it might be to go back to your old high school economics textbooks and turn to the pages concerning supply and demand. In those pages, you will find all you really need to explain why Bitcoin fluctuates in value so wildly even though it can also act as legal currency like any other money you can imagine.
Bitcoin might not have physical characteristics like the coins or bills which you can hold in your hands and exchange for goods and services. It also might not be a company which stands as the symbol of your investment capital when you buy stocks. Yet this digital creation straddles both of those realms and provides those who hold Bitcoin with both utility and value. The utility comes from the ease with which it can help people conduct transactions. The value comes from its investment potential. If you’re interested in investing but still are at sea to how Bitcoin works, you might benefit from a trading program like Bitcoin Code. If, however, you want to get a grasp on the concept, look back to the basics of supply and demand.
1. The Basics
You might remember from your school days how supply and demand works. An asset which is in demand, usually because of the scarcity of supply, will demand a high cost. Once the cost becomes too prohibitive, people will stop buying, causing the supply to increase. That will bring the cost down as sellers still try to find ways of making a profit. It is essentially a never-ending cycle that perpetuates itself again and again in the life of an asset.
2. Related to Bitcoin
The people who created Bitcoin purposely limited the amount of supply of the coins to keep its value from diluting. New coins are created each time a miner verifies a transaction over the Bitcoin network, incrementally increasing the supply of coins available. At some point, the coins will no longer be mined, or at least that was the original idea, meaning that the coins will be kept at a finite amount.
3. The Value
Because people actively buy and sell Bitcoin as if it were an asset like a stock, the amount in play is always changing dramatically, making the coins rise and fall in value. Many fears that Bitcoin will be outlawed in some way by fearful governments, at which point all value will be lost because there will be no demand for a worthless asset.
If that doesn’t occur, the fluctuation of Bitcoin prices will continue. As an investor, it helps to understand what it’s all about before making the dive, which is why going back to simple supply and demand is a good start in this process.