Where Do Cryptocurrencies Get Their Value?

How Does Bitcoin Increase in Value? As bitcoin nears its maximum limit, demand for it increases. The increased.
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A functional and decentralised digital currency
Who Sets Bitcoin's Price?
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The real costs of mining will thus be replicated, too. But as the success of government-issued fiat currencies shows, the universe of speculative bubbles is by no means restricted to cryptocurrencies such as bitcoin. After all, in a world with flexible prices, there is always an equilibrium where everyone believes the official fiat currency has no value—in which case it consequently has no value.

Most government-issued fiat currencies appear to have stumbled into this fundamental equilibrium and stayed there. Keynesians ignore these multiple equilibria, viewing the price level and thus the price of money as uniquely determined by history and updated gradually through a mechanism like the Phillips curve, which posits a stable and inverse relationship between unexpected inflation and unemployment. Regardless of which perspective one adopts, real-world hyperinflations—think of Weimar Germany or the recent cases of Venezuela and Zimbabwe—that effectively reduce the value of money to zero are examples not of nonfundamental equilibria, but rather of fundamental equilibria gone bad.

In these cases, money stocks exploded, and the price level responded accordingly. Private cryptocurrencies and public fiat currencies have the same infinite range of possible equilibria. The zero-price equilibrium is always a possibility, as is the unique, well-behaved fundamental equilibrium.

Bitcoin clearly is exhibiting neither of these equilibria at the moment. What we have instead appears to be a variant of a nonfundamental explosive price equilibrium. It is a variant because it must allow for bitcoin to make a possible, if unexpected, jump from its current explosive price trajectory to either the nice fundamental equilibrium or the not-so-nice zero-price scenario. This multiple-equilibrium perspective doubtless makes it appear risky to invest in intrinsically valueless assets like bitcoin and other private cryptocurrencies.

A functional and decentralised digital currency

Illiquid market: Who owns bitcoin? The real world is of course not constrained by the range of possible equilibria supported by the mainstream economic theory outlined here. Reshape Tomorrow Tomorrow is different. Let's reshape it today. TomorrowMakers Let's get smarter about money. Corning Gorilla Glass TougherTogether.

Who Sets Bitcoin's Price?

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Bitcoin Exchanges. Bitcoin Advantages and Disadvantages. Bitcoin vs. Other Cryptocurrencies. Bitcoin Value and Price. Cryptocurrency Bitcoin. Table of Contents Expand. What Determines Bitcoin's Price? Understanding What Determines Bitcoin's Price. Supply and Demand. Cost of Production. Availability on Currency Exchanges.

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Regulations and Legal Matters. Forks and Governance Stability. Key Takeaways Purchasing stocks grants you ownership in a company, whereas purchasing bitcoin grants you ownership of that cryptocurrency. Bitcoin is neither issued nor regulated by a central government and therefore is not subject to governmental monetary policies. Bitcoin prices are primarily affected by its supply, the market's demand for it, availability, and competing cryptocurrencies.

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