Bitcoin & The Economy

Unlike the financial systems in place around the world, bitcoins are created at a fixed rate – one that was decided on when Bitcoin first launched. Because of this, Bitcoin mining is very competitive. The scarcity of bitcoins is gradually making them more and more valuable. With a finite number going to be available, their value is likely to increase over time.

As more people join the Bitcoin network, it becomes more and more difficult to make a profit with Bitcoin mining – unless you throw a lot of money at the problem and buy expensive hardware that you can dedicate just to Bitcoin mining. At the same time, because Bitcoin is a decentralized system, no one person is able to control or manipulate Bitcoin in order to line their own pockets with money.

Add to that the fact that bitcoins are created at a predictable and decreasing rate over time, and it’s easy to see why so many people are excited about the possibility of making a fortune by mining bitcoins or speculating on their value over time. When 21 million bitcoins are produced, it’s going to likely increase their value even more – if Bitcoin is still around in 2140.

Why Bitcoin Has Gained Traction Over Time

For some, it’s hard to imagine one person’s idea becoming reality – something that has gained popularity all over the world. On the other hand, the Internet has enabled many similar success stories to happen. Still, there are reasons that Bitcoin has managed to gain traction over time. We’re going to go over some of the main ones so that you have a better idea of how it’s spread so far so fast.

  • ●  It’s Useful – First, you have to look at the fact that Bitcoin is useful. It manages to fulfill a need for many people around the world.
  • ●  Decentralized – The fact that the Bitcoin network is not controlled by a single person or corporation has helped it gain favor with the world’s population.
  • ●  It’s Easy – Another reason Bitcoin has become so popular is that it’s relatively easy to set-up and understand. Within 5 minutes most people can have a Bitcoin Wallet installed and connected to the network.
  • ●  Convenient – Additionally, once you have your Bitcoin Client setup and connected to the network, it’s amazingly convenient to transfer money.
  • ●  Barriers Removed – One of the biggest reasons that Bitcoin has caught on and become insanely popular is that it works to remove barriers that cause people problems.

As you can see, Bitcoin is popular for many of the same reasons physical currency is popular around the world. It makes modern life possible and a little bit easier.

What is The Value Of Bitcoin

We’re now going to take a look at the true value of bitcoins. All that is needed for currency to hold value is trust in the currency and people using it. This is one of the main reasons that bitcoins now have value. It has been accepted as being valuable by a large group of people, both buyers and merchants. A lot of people around the world now accept Bitcoin as a means of payment.

Additionally, the fact that Bitcoin has spawned so many startup companies around the world is testament to bitcoins having value. Having said that, Bitcoin is like any other currency. That is to say that their value is measured in part by what people believe they’re worth. The single biggest thing to remember is that if they weren’t accepted as payment they would have no intrinsic value.

In the past, many currencies were backed by physical assets – typically gold and other precious metals. Because they’re rare around the heavier elements have value. This value was passed on to bits of paper and metal coins to make it easier to transfer wealth from one person to another. Over time, a lot of governments switched to fiat currency, which is NOT backed by precious metals. This is why countries can simply print money to stimulate the income. However, doing so causes inflation and the money ends up being worthless.

Because Bitcoin is not backed by physical assets and its creation is decentralized, its value relies on the confidence people have in the virtual cryptocurrency. At first bitcoins had no value at all. Then, gradually, as more people became involved and began to give them value, their overall value increased. It’s important to note that the value of a Bitcoin will vary from exchange to exchange, showing that the value really is what people are willing to spend on it.

If you know anything about the history of finance, you’ve probably heard the story of the Dutch Tulip Market. In the country, tulip bulbs were rare and had value. Over time, they became more and more valuable as the market was worked into a frenzy. The price skyrocketed until people started getting scared and sold all of their tulips. As this happened, the prices plummeted until they were back to “normal” for the most part.

Unfortunately, the same thing could conceivably happen with the value of a Bitcoin. During 2012 and 2013, the value of 1 BTC rose quite a bit, with each Bitcoin being worth several hundred dollars. The value drops occasionally, but it’s still trending upward, becoming more and more valuable as time passes and the 21 million Bitcoin limit nears.

Let’s take a look at some of the main reasons that the value of a Bitcoin has been increasing and will likely continue to increase in value in the years ahead.

  1. Major Investors – One of the main things that has helped the value of bitcoins to increase so much recently is the fact that a lot of “deep pocket” investors have begun to take notice of Bitcoin and its potential for making a profit. Some companies have made very large purchases of bitcoins, betting that they’re going to increase in value. This only leads to Bitcoin becoming even more popular and valuable, of course.
  2. BTC China – Another thing to look at is the birth and rise of BTC China – now the largest Bitcoin Exchange in the world. As many Chinese try to find ways to safely invest their money, Bitcoin has become a way to get around regulations in that country. This surge in popularity led to BTC China being set up. After launching, it quickly became responsible for most of the Bitcoin transactions worldwide. With a population well over 1 billion people, the acceptance of Bitcoin in this market is a good sign that it’s going to continue increasing in value.
  3. Startups – Also, the fact that a lot of startups are being created to fulfill needs in the Bitcoin market is further proof that not only are bitcoins going to be around, a lot of smart people are betting that they’re going to increase in value. While tens of millions of dollars have been invested in Bitcoin startups over the last couple years, this number is expected to increase as even more people try to monetize the growing Bitcoin market.
  4. New Exchanges – When you look at the number of Bitcoin Exchanges that are starting up around the world, it’s yet another sign that Bitcoin is here to say. Some websites count the current total of Bitcoin Marketplaces online to around fifty currently in early 2014, with new ones popping up all the time. This growth shows that many people are betting that Bitcoin is going to be around for years to come.
  5. Mining Difficulty – With so much competition and computing power going into Bitcoin mining these days, it’s become nearly impossible for a single individual to mine enough bitcoins to break even, let alone make a profit. This, of course, drives the value of bitcoins up even more because it is so difficult to create new bitcoins by solving blocks and adding them to the block chain.
  6. Limited Government Involvement – This is likely to change in the coming years, but for now the lack of government regulations have really allowed Bitcoin to flourish and grow in many parts of the world. This is already changing as governments begin to take Bitcoin seriously. The fact that they’re starting to do this also shows that Bitcoin has broken some barrier and become a reality that will be around for years to come, increasing in value all the time.
  7. Payment Acceptance – As more and more businesses – some major ones even – begin to accept BTC as payment for goods and service, this is only going to help cement the crytocurrency and increase its value over time.

8. Media Attention – Whether it’s the local newspaper, a national TV network or on the radio, the mainstream media is currently fascinated with everything Bitcoin. They may think of it as “Magic Internet Money,” but as more join the Bitcoin community, the coverage is going to change. Someday you might find television shows (and entire networks) dedicated to Bitcoin prices and markets.

9. The Internet – Additionally, beyond the mainstream media, the Internet and the world wide web have made it possible for knowledge about Bitcoin to spread far and wide quickly. This has led to the virtual currency becoming more valuable as well. From bloggers to forums dedicated to Bitcoin popping up, the Internet is abuzz with talk of Bitcoin, which helps bring more people into the network, driving the value of a Bitcoin up even more.

Looking at the list above, it’s easy to see why there’s been such an increase in the value of bitcoins in the last couple years. What’s really amazing is that Bitcoin is still at the very early stages of its life as a worldwide currency. This means there are sure to be a lot of changes – some probably dramatic – in the months and years ahead as Bitcoin matures and gains more acceptance around the world.

Supply, Demand, and Bitcoin

As you know, the value of a Bitcoin is subject to change quite frequently – both up and down. It’s important to note that there is always a fixed number of bitcoins available on the market. As long as new bitcoins are being added to the network via Bitcoin Mining, this number will change, but at some point, BTC 21 million will be reached and there will be no more new bitcoins produced via mining.

However, Bitcoin is a very speculative market. That is, there’s no easy way to predict whether prices are going to rise or fall at any one moment. Because they’re produced at a steady rate, it’s not possible to suddenly start producing more as the value rises, slowing the growth of the value. This doesn’t really happen, though, because bitcoins are created at a steady rate – with one block being solved every ten minutes.

What currently happens a lot of the time is that as the perceived value of 1 BTC rises, people become more interested in purchasing them, which drives the value up even more. As seen with the tulip market in the past, this can’t go on forever unchecked, but Bitcoin is a bit different that tulips in that there is a finite and knowable amount of them that will be in circulation – 21 million to be exact.

Even though the traditional model of supply and demand doesn’t fit exactly with Bitcoin because it’s such a speculative market, some of the lessons do still apply. For example, as mentioned, as more people snatch up bitcoins, the higher their value rises. That is, with more demand, the price will go up. Beyond that, it’s going to be interesting to see younger generations begin to study the Bitcoin markets to come up with different ways to look at financial activity.

Bitcoin Deflation And Economic Activity

While the future of Bitcoin does indeed look bright, there are some economists who are thinking ahead and say that the cryptocurrency may have a problem in the future due to deflation. The amount of bitcoins that will be produced is fixed at 21 million. This supply of BTC will be used to buy more and more goods and services while it could end up in deflation on a major scale.

For example, say you come up with a product or service that costs you 1 BTC to produce. You hope to sell it for 2.5 BTC to make a hefty profit. You go to work setting things up, but when you launch to market, your product or service is only worth .5 BTC due to deflation that has happened while you were producing your product or setting up your service to sell online – and this could be a major stumbling block.

As this happens, people are going to be more apt to hold onto their bitcoins because they will become more valuable. However, if no one is using their bitcoins for transactions, the whole system could collapse eventually. And there’s a good chance people are NOT going to spend if they know that waiting a little while will give them more buying power per BTC. It’s this shrinking price versus cost margin that could really hurt Bitcoin.

During deflationary periods, there’s no good reason to keep investing current BTC in producing products or developing services to sell. This is going to affect both the people producing goods and services as well as consumers – who are going to want to wait a little bit until their money can buy more. This is just common sense. However, it may end up in what’s known as a deflationary spiral – something that’s difficult to escape.

This is not happening right now because people are using USD or other currencies to create products or come up with services and then selling them by collecting BTC in return. This is going to change, however, as Bitcoin becomes more popular around the world. At some point, people are going to start trying to use BTC to invest in creating products and services and it’s at this time that problems may begin appearing for the Bitcoin universe.

The way to avoid this would be to keep other currency systems in place. This may – at some point – become difficult if not impossible to do if Bitcoin continues to increase in popularity around the world. As more people and businesses begin to rely heavily on Bitcoin, there’s a chance that the deflationary spiral may begin, causing a lot of damage to people – and the whole system – along the way.

While this is hypothetical and not a lot of economists have begun to study the Bitcoin market, it’s still a possibility that may happen. And this makes it an important issue that should be discussed publicly before the problem actually occurs. The problem is that there isn’t enough interest in Bitcoin … yet. This is changing, however, and there’s a good chance other economists and financial wizards will begin to look at the Bitcoin system in earnest. And this is a good thing on many different levels.

Digital Currency’s Future

Speaking of the future of Bitcoin – and other digital currencies – it’s going to become more important to study different aspects of Bitcoin and other virtual currencies so that big problems do not arise and take everyone by surprise. A crash of the Bitcoin market is a possibility, and with billions of dollars at stake, it could have far reaching effects around the world.

When you look at the global market, you can also see why Bitcoin and other cryptocurrencies are becoming more popular all the time. In many countries – from South America to Southeast Asia – many billions of people do not have access to traditional credit systems or even digital payments. Bitcoin may be able to open up a lot of possibilities for these people in the third world.

And if that does happen, there’s a good chance that Bitcoin will take off and begin to grow even more quickly as people begin to use it rather than relying on traditional financial institutions – which usually aren’t benefiting the people on the bottom of the societal ladder. The benefits of Bitcoin to people around the world is really staggering when you step back and think about it for a moment or two.

For example, with Bitcoin it’s much easier to make international payments without risk of credit card fraud – something that’s becoming more and more of a problem these days. Quite a few countries don’t even accept credit card payments for one reason or another, which isolates quite a few societies around the planet. That isn’t good in the grand scheme of things, which is why Bitcoin is being heralded as a lifesaver for some.

Another way that Bitcoin may spread quickly in the future is as a means for international workers to send money back to their families without huge transaction fees. Companies like Western Union (and even PayPal) may find that they no longer have enough business to keep operating if Bitcoin really takes off and people begin using it to send money to their families in another country.

Why should the people give large corporations billions of dollars per year in transaction fees when Bitcoin can do the same for free? This is actually one of the reasons that Bitcoin may have problems in the future as it grows. Large banks and other companies are likely to cry foul as they lose billions in revenue to Bitcoin. And if they do start to complain, there’s a good chance that governments and regulatory agencies are going to take notice and try to appease them by shutting down Bitcoin or at least trying to slow it down.

At the same time, a lot of people are going to be on the side of Bitcoin. What will senators and other politicians say when their constituents start talking to them about Bitcoin and other virtual currencies? They’re going to have to listen if enough people stand up and start taking them to task for trying to take Bitcoin out of the picture. This is why Bitcoin’s future is looking bright – the people.

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