There is a stark difference between the concepts of price and value. The first is a digital and intrinsic representation of an asset’s market worth expressed in a universally accepted unit of currency. The price is determined by two key factors – the supply and demand. The supply and demand curve is driven by the law of scarcity, which dictates that the rarer a commodity – the higher its price, since it is coveted by a greater number of people willing to pay said price to obtain it. That is the basic economic foundation for the concept of a price, excluding the surrounding factors, such as push and pull inflation or demand, artificial demand, and others.
As for value, the concept differs cardinally, as it is a purely subjective interpretation of an asset’s worth expressed in the benefit it yields to the owner. This concept extends well beyond the asset itself to intangible concepts as well, such as the values we cherish and uphold, the value of a certain relationship in terms of what it yields, the value of a commodity from an intrinsic or perceived point of view, and many others. In essence, the value is what one would receive from an asset or concept on an individual basis and what price they would put on it based on such an interpretation.
Cryptocurrencies are no strangers to either concept – price and value, as they were originally designed as value carriers, promising the world a parallel digital economy based on a peer-to-peer exchange principle without any external government interference. Times have changed.
Bitcoin, like any other cryptocurrency, receives its worth from the basic concept of supply and demand and the injected concept of individual, subjective worth. Cryptocurrencies are extremely prone to external interference, which is why their prices swing up and down as news backgrounds change. The same applies to Bitcoin, which derives its value from:
- The news surrounding it;
- The adoption rate;
- Its usability in various applications;
- The supply and demand for it.
Combined, these factors make up the price of Bitcoin, which in itself is backed by its value. The latter, actually, is based on a fully subjective perception of the asset, since Bitcoin is mostly an asset used as a store of value, rather than as a real means of settlement. No one in their right minds would use Bitcoin to buy a pizza nowadays, since its price is currently hovering around the $26,000 mark and many predict that it will rise in the near future.
The price of Bitcoin is not indicative of its value, only of the momentary background surrounding its perception as a store of value and its usefulness as a speculative asset. If the price were to be used as the sole indicator for the value of Bitcoin, the asset would be much, much cheaper, since its application in any real platforms or services is limited at best. Most of the latter accept fiat anyway, so using cryptocurrencies is more of a needless hassle than a benefit. Just connect your bank card and pay.
As such, value and price are two different concepts that can find their reflection on the example of Bitcoin. If price is objectively set by supply and demand, then value has a more refined and personal meaning to it.