Once upon a time there were 21 million Bitcoins but then it turned out that some of the Bitcoins were lost Bitcoins never to be discovered again.
It’s all about supply and demand
Similar to currency, equity, bond and currency markets the market for Bitcoin is based on the simple economics of supply and demand. The supply of Bitcoin is based on the number of Bitcoins that have been mined to date. This will eventually reach a maximum of 21 million Bitcoins. However, this won’t occur until 2140 so there’s no need to panic just yet.
On the other side of the equation, demand is determined by the resultant uses and needs for Bitcoin. To date there are potentially multiple uses for Bitcoin. Bitcoin is being used for several online and real world transactions in order to purchase goods and services. Furthermore, Bitcoin appears to be used as a global currency, a digital currency for the internet and as a master coin for purchasing altcoins. Additionally, Bitcoin seems to be used as a barometer for the future of blockchain and cryptocurrency in general. Bitcoin is also used for cross border transfers and escrow services as well as being a store of value and a potential replacement for gold.
Bitcoin is even been seen by some as having more nefarious uses. Some accuse it as being used as a money laundering tool as it seems to be used by criminals and gangs who wish to remain undetected. Finally, others view Bitcoin as a mindless gambling product for speculators looking to trade their way to a quick buck.
The price is right
The price of Bitcoin is determined by these market forces of supply and demand meeting at equilibrium. This is the price at which sellers that are willing to sell are met by an equal numbers of buyers willing to buy.
The investment process
Investors and speculators looking to make money from Bitcoin are constantly trying estimate the weight of the opposing forces of supply and demand. They try to estimate what the future demand of Bitcoin is likely to be using proxy markets such as currency or gold markets. They assess what the total value of that demand might be. They then divide the value of that demand by the number of Bitcoins in existence to get a value per Bitcoin today.
For example, let’s say an investor assumed that the value of Bitcoin should be based as a percentage of the gold market. The gold market today is worth about $7.6 trillion. Let’s say that Bitcoin was able to capture 10% of the gold market. This would value the market for Bitcoin at $760 billion. Given that at its maximum there will be 21 million Bitcoins. This means that the price per coin would be $36,190.
You forgot about the lost Bitcoins
Before you decide to invest we haven’t finished yet. It is estimated that there are up to 4 million lost Bitcoins, presumed out of circulation. Whilst the exact figure is disputed, it is generally considered that between 17% to 23% of Bitcoins are no longer in circulation. As such, the valuation per coin could be significantly higher than we first thought.
Why are there lost Bitcoins?
There are several reasons for the lost Bitcoins.. The main reason is through human error. There are countless stories of early Bitcoin miners having dabbled for a short time and then leaving the mining business. Those involved in the early days generated some Bitcoin then either threw away or lost their hard-drive, ignoring the then worthless Bitcoin stored there. They weren’t to know that Bitcoin would take off in the way that it had.
All Bitcoin wallets require the human user to remember their private keys. Sadly, humans are fallible and can and often do lose their private keys. As a result, the Bitcoins stored in those wallets are lost forever.
There are also several holders of Bitcoin with no intention of selling any time soon. They’re simply hodling (holding long term) their Bitcoin for the long term thus removing them from circulation for the medium to long term.
Finally, the original 1,041,715 Bitcoins mined by Satoshi Nakamoto are considered to be “lost”. Satoshi Nakamoto disappeared from the Bitcoin scene back in 2011 and hasn’t been heard from since. It is generally considered that Nakamoto’s coins will never be back in circulation for fear of revealing his identity.
In summary, the significance of the lost Bitcoin is that an adjustment must be made to the generally accepted total supply. This has implications for the fair value of the Bitcoin market that any would be investor must consider.