Understanding the Financials of Bitcoin

Submitted by editor on Mon, 02/26/2018 - 21:38

There are over 1500 cryptocurrencies available on most of the major exchanges. Each one is vying for the top spot, the coin that is taken up and used most as a transactional medium. Currently Bitcoin is the biggest and by looking at a breakdown of the financials we can see how this works. The basic information here applies to any cryptocurrency of course.

Bitcoin Price
Firstly let’s look at the Bitcoin price. The price is the perceived value set through the willingness to buy and sell Bitcoin in the marketplace. This can vary slightly depending on the country and even on the exchange. So a site such as coingecko.com looks at all the prices to come up with an average. This is why the price on the exchange you use may differ from that on coingecko.com. How valuable is Bitcoin is considered to be at any one time? Various factors enter into formulating the price such as the current demand, the price per transaction, the ability to Use the coin and the exchange rate between fiat currencies may also have an effect (when the rate between fiat currencies such as the USD and AUD for example, changes the value of Bitcoin may change also in the relevant fiat currency)

Market Capitalization
The market capitalization is the average value of all the coins of a particular cryptocurrency for sale on the market right now. I say average because the Bitcoin price may be slightly different in each country and even in each cryptocurrency exchange. It is worked out as the the current total supply of Bitcoins multiplied by the Bitcoin price. It is a useful indicator of demand as it shows you how much money has been invested in Bitcoin and thus the level of confidence in the currency. It is also the factor that determines the rank among cryptocurrencies.

Liquidity is another factor that can assist in determining the popularity and price of a cryptocurrency coin. It is determined by its ability to be turned into cash or fiat currency. Hence the more exchanges the coin is listed on the easier it is to be turned into cash. Bitcoin has the most liquidity recently averaging somewhere around 4.6 billion USD value traded in a 24 hour period.

Another useful factor in determining the value and popularity of a cryptocurrency is the Developer. This is indicative of the work the original or additional developers undertake with the coin. Sometimes the original developer will not continue with the development of a coin and allow it to lapse resulting in little if any movement or expansion in their uptake of the coin. If you go to the very end of the coingecko.com list of 1500 or so coins for example, you can see many coins that have little or no value or movement at all. Of course Bitcoin has the most with a Developer value of 98%. Other coins such as Ethereum, Bitcoin Cash, Lie coin etc have correspondingly lower percentages.

How much community interest is there in the coin? A good way to improve the value of a coin is to generate more community interest. Little or no interest usually indicates no growth either in value or market capitalization. If community activity increases suddenly this may indicate a potential growth spurt in the value of the coin.

Which coin will be the most used coin in the future? Which will become the standard for transactions? Each coin of course, is aiming for that top spot in terms of use and popularity. It is likely that no one particular coin will achieve that goal. Each coin is different and coins have been developed that perform a specific function. For example Ripple has been designed primarily for banks to use while Stellar is more for consumer use. Bitcoin looks like it it will be used more for big ticket items (currently it can be used to purchase cars, such as the traditional Lambo, and Real Estate) while coins such as the emerging Electroneum are being touted as a currency for small transactions such as a cup of coffee. The two main factors in using any currency are price per transaction and speed of transaction. Bitcoin has had some bugs in those areas but these seem to be ironing out as developers get onto solving the issues. Speed of delivery dropped drastically for a period but is now speeding up. Similarly the price per transaction grew so much that it was prohibitive to ‘spend’ small amounts of bitcoin. This is an issue that is slowly being resolved as we write.

Bitcoin is here to stay. It seems evident it will remain the top of the heap but which coin will be the most popular for every day transactions is still anyone’s guess.

This article is for information purposes only and is not to be construed as financial information for any purpose such as investment or speculation and it is the responsibility of the reader to perform proper due diligence before acting upon any of the information provided. We recommend that you consult with a licensed, qualified investment advisor before making any investment decisions.