Bitcoin stands as the most recognized and heavily traded cryptocurrency for over a decade. When its price surged to $69,000 in 2021, skeptics were stunned, reigniting intense discussions about its intrinsic worth. This article explores the core factors influencing Bitcoin’s valuation, examines popular valuation models, and clarifies the relationship between widespread adoption and price movements.
What Determines Bitcoin’s Price?
To function effectively as money, Bitcoin must exhibit several key characteristics: scarcity, divisibility, acceptability, portability, durability, and uniformity. As a digital currency, it easily meets portability, durability, and uniformity. Divisibility is also predefined, with the smallest unit—a satoshi—equaling one-millionth of a Bitcoin. Thus, Bitcoin’s value is primarily shaped by its scarcity and acceptability.
The first major Bitcoin bull run began in 2013, nearly five years after its creation, signaling the start of broader adoption. Growing demand for decentralization across sectors has further highlighted Bitcoin’s appeal, as it operates outside traditional regulatory frameworks and government influence.
Higher acceptance drives greater demand. Since Bitcoin mining isn’t affordable for everyone, its supply remains limited. Scarcity, therefore, is a crucial value driver for this digital asset.
Bitcoin’s Supply Over the Years
Bitcoin’s creator designed it with a long-term perspective, capping its maximum supply at 21 million coins. To date, nearly 92% of this supply has been mined, approaching a significant milestone. Of the 19.374 million Bitcoin already mined, an estimated 4 million are permanently out of circulation due to:
- Lost private keys, where owners or their heirs cannot access wallets.
- Intentional or accidental transfers to unusable addresses, effectively burning them.
- The 1.1 million Bitcoin held by Satoshi Nakamoto, which have remained untouched for over a decade.
Other factors, like inactive "whale" wallets, also ensure the circulating supply will never reach the theoretical maximum. The chart below illustrates this dynamic:
Source: Custom chart using Glassnode data
Multiple bull markets since 2017, coupled with over 40% of Bitcoin remaining inactive, reinforce its scarcity and support upward price momentum.
Institutional Adoption
Since the 2020 market rebound, institutions have increasingly embraced crypto—either by adding it to their balance sheets or investing through vehicles like the Grayscale Bitcoin Trust (GBTC), Bitcoin ETFs, or CME Bitcoin futures. Wall Street’s growing acceptance signals a shift toward digital asset integration.
Many major companies have also started accepting Bitcoin as payment for goods and services. These include Microsoft (for Xbox Live, apps, and games), Wikipedia (donations), PayPal, Starbucks (via BitPay), Twitch, and Rakuten. Tesla briefly accepted Bitcoin before retracting the option, but the media attention alone helped push prices to all-time highs. Traditional banks’ growing interest has further bolstered Bitcoin’s perceived value.
Image: Bitcoin buying/selling interface on PayPal. Source: PayPal US.
Media Hype and Public Perception
Even those who have never owned Bitcoin have likely heard of it. Bullish sentiment peaked in 2017 and 2019, when Bitcoin repeatedly set new records. Search volumes for “Bitcoin” and “BTC” correlated strongly with these adoption waves. Increased online content around investing and transferring Bitcoin has made it more accessible, reinforcing its price appreciation.
Source: Structured data from Google Trends and CoinGecko
Correlation with Other Assets
Like the US dollar, Bitcoin exerts significant influence over other cryptocurrencies. Although its dominance has declined over time, it remains the most recognized and widely used crypto. Several Bitcoin rallies have inspired new cryptocurrencies and accelerated digital asset innovation.
Bitcoin’s correlation with traditional assets—such as stocks (S&P500, NASDAQ100), commodities, and even bonds—has also grown. Many financial institutions now view Bitcoin as an emerging asset class and use it for portfolio diversification.
Source: Bitcoin’s 1-year correlation with S&P500. CoinMetrics.io
Bitcoin’s Price History
Bitcoin’s journey from worthless to valuable is remarkable. After Satoshi Nakamoto published the whitepaper, it spent nearly five years with minimal circulation. Did you know May 22 is celebrated as Bitcoin Pizza Day? It marks the first commercial Bitcoin transaction—10,000 BTC for two pizzas in 2010.
Bitcoin took over three years to reach the $1,000 mark, coinciding with the installation of the first Bitcoin ATM in Vancouver. But the rally was short-lived. Many skeptics declared it a scam, only to be stunned by the 2017 surge past $20,000—a 20x return in under 12 months. This boom attracted mainstream media attention and encouraged retail investors to start trading and holding Bitcoin.
The rest is price history.
An Alternative Store of Value?
Can Bitcoin truly serve as a store of value? Gold has historically been the most reliable store of wealth, especially during uncertainty. Many argue Bitcoin’s volatility disqualifies it, but gold faced similar skepticism in the 1740s. When the US ended dollar convertibility to gold in 1971, the metal struggled to establish itself—swinging wildly in value. For example, gold rose 73% in 1974, then fell 24% in 1975. By 1982, it had lost nearly two-thirds of its value from just two years prior.
Source: 1970s gold price chart. macrotrends.net
Bitcoin appears to be on a similar path. It has experienced sharp volatility, but data shows decreasing fluctuations as its value stabilizes.
Source: buybitcoinworldwide.com
It’s too early to dismiss Bitcoin as a future store of value. Like all other stores of value, it started from scratch. Given its current market cap, there is much to observe before it reaches stability. Growing social activism and demand for decentralized payment systems could further support this momentum.
How Much of the World’s Wealth Is Bitcoin?
Global wealth reached $630 trillion in 2022. On December 31, 2022, Bitcoin’s market cap was $319.72 billion, with a price of $16,604.02. This represented just 0.05% of total global wealth.
Bitcoin Valuation Models
Valuation models aim to represent Bitcoin’s future price trajectory. Here are two widely used approaches.
Stock-to-Flow Model
This model compares Bitcoin to precious metals like gold, silver, and platinum, because:
- Its supply cannot be easily inflated, ensuring scarcity.
- Acquisition requires time and effort.
- It retains value over long periods.
As a potential store of value, Bitcoin’s stock-to-flow ratio—circulating supply divided by annual new issuance—becomes key. A higher ratio implies lower price elasticity and greater value.
Introduced by PlanB (a pseudonymous analyst) in 2019, this model has so far aligned closely with Bitcoin’s price movements.
Source: lookintobitcoin.com
Fair Value Model
Claude Erb, a former commodity portfolio manager at TCW Group, developed a model that doesn’t predict future prices but derives Bitcoin’s fair value from network effects. This refers to the disproportionate growth in network value as user numbers increase.
Source: Claude Erb
Although Erb’s valuation often diverges from market prices, Bitcoin’s fair value has consistently risen since 2010. All publicly traded assets experience similar fair value fluctuations.
In summary, Bitcoin’s value is determined by fundamental supply and demand mechanisms, much like any established asset. As decentralization gains momentum, Bitcoin leads the charge, undergoing rigorous testing to prove its merit as a genuine store of value.
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Frequently Asked Questions
What gives Bitcoin its value?
Bitcoin derives value from its scarcity, decentralization, and growing acceptance as a digital asset. Its fixed supply cap of 21 million coins ensures scarcity, while adoption by institutions and individuals boosts demand and utility.
How does Bitcoin’s volatility affect its store of value potential?
High volatility currently challenges Bitcoin’s role as a short-term store of value. However, historical assets like gold also experienced similar volatility early on. As Bitcoin matures and market capitalization grows, its price fluctuations are likely to decrease.
Can Bitcoin eventually replace traditional currencies?
While Bitcoin is increasingly accepted as payment, it currently functions more as a speculative asset and value store than a daily currency. Scalability issues and price volatility must be addressed for it to compete with traditional fiat currencies.
What is the impact of institutional adoption on Bitcoin’s price?
Institutional adoption increases demand, reduces circulating supply, and enhances credibility. Investments through ETFs, trusts, and corporate balance sheets contribute significantly to price appreciation and stability.
How accurate are Bitcoin valuation models?
Models like stock-to-flow and fair value provide useful frameworks but are not infallible. They rely on assumptions that may change over time, such as adoption rates and macroeconomic conditions, so they should be used as guides rather than absolute predictors.
Is it too late to invest in Bitcoin?
Bitcoin’s market cap remains a fraction of global wealth, suggesting room for growth. However, due to its volatility, it should be approached as a high-risk, high-reward investment within a diversified portfolio.