Photo by Worldspectrum from Pexels

The most widely misunderstood fact on Bitcoin

Many things are subject to opinion, but this is an attempt to explain an undisputed fact that is often misunderstood. Here is a real tweet:

“It’s pretty much a coin for the rich. So hopefully all the rich people get into it big time, because the every day working person making 40k a year or even less will not be buying it.” — Scott73187192

(Note: The price of 1 BTC was around $41k when this was posted.)

It’s disappointing how many people misunderstand this. In traditional investing, you cannot purchase a partial share of a company stock, so maybe the false assumption is born from that parallel.

The Fact: The cost to buy Bitcoin can be as little as $1. Unlike shares, you can buy a partial amount of 1 BTC; in fact, there are names for the different fractional units:

0.00100000 BTC = 1 millibit (mBTC)

0.00000100 BTC = 1 microbit (uBTC)

0.00000001 BTC = 1 satoshi (sat)

So, if the price of 1 BTC is $40,000, you can purchase 1 mBTC for $40. If the price of 1 BTC doubles to $80,000, you will double your $40 investment, the same as a person investing $400,000 would double their investment to $800,000.

How is the price of 1 BTC derived? Fundamentally like any public share, the price is purely based on market demand — i.e., if a buyer and seller agree on a price and execute a trade, that is the last known price. Like foreign currency, there is no single source of truth on this price, as different exchanges are executing thousands of trades simultaneously with differing amounts, but aggregators will collate all the trades and display a mid-market price which is the closest you can get to one number. The CoinDesk price index is an equivalent of this in Bitcoin.

So how do buyers and sellers determine a price? When dealing with shares of a company, the total value of the company — its market capitalization — is assessed subjectively by many metrics. What’s the company’s annual revenue? Profit? Debt? Assets? There are many formulas that can be used and once the market cap is “expertly” assessed, you simply divide that number by the number of shares in existence. E.g. a company has a perceived $1 million market cap and 1,000 available shares, so its share price is $1,000.

The price of 1 BTC is also a calculation of how many current BTC units are in existence (this is known) divided into the perceived total value that Bitcoin provides to the world (this is subjective). At the current price of $41,399 per BTC and known units in circulation of 18.77M, the market cap of BTC is $777M. Is that too high? Too low?

The Bitcoin optimist’s view is its inherent properties means it can and should be the world’s reserve currency instead of the US dollar or any other government-controlled money. If that were to happen, its value should far, far exceed that of gold, which currently has a market cap of $11.54 trillion, making gold currently valued 15 times higher than Bitcoin.

You have to make your own decision on if you think Bitcoin has that potential. Even if it were not to replace a fiat currency, Bitcoin is finite by nature. It is mathematically enforced that there will never be more than 21 BTC units in existence. This means its value must increase over time with all other factors being equal. So, unless Bitcoin is one day universally determined to hold absolute zero value or less people hold it tomorrow than they do today, then its value simply must trend upward.