I get asked this a lot, so here's my explanation of WHY Bitcoin is worth so much US Dollars (or any other currency for that matter).

As with every free market, you have people who want to own something.

I have a thing. I paid $5 for this thing last year and I really like it. You want my thing. You offer me $5, but I refuse, as I want this thing as well. So, you offer me $6 for this thing. I still refuse and say it will cost you $10 for me to part with my thing, because I really like it, and you cannot obtain this thing without finding another person who MIGHT want to sell this thing. You decide that you will offer me $9 and after some thought, I accept. The value we have both agreed for this thing is $9.

Now imagine that in an entire room full of people. There are people agreeing to buy or sell a thing at different prices. Some smart people realize they can buy a thing at $7 and turn around to immediately sell it at $9 to people. After enough buying/selling of things, all the buyers and sellers have met a happy medium. We now see that no one will buy the thing at $9 and no one will sell their thing for $7. At this point, most people believe that the thing is worth around $8, because when it is cheaper people will buy it, but if it is more expensive, no one will buy it.

Now we learn that this thing can help people with a common task in their lives, or it has a cultural value, or some rich guy is buying as many things as he can because he wants all the things.

Suddenly, nobody wants to part with their thing after hearing this news. Eventually, someone starts making more and more generous offers for this thing. One person agreed to part with their thing for $15 because they really liked the profit they made. News travels, and the things are now selling at $15 because so many people believe the true value of the thing is $15, but they only paid around $8. Some people decide to still keep their things because maybe their thing will be even more scarce and sell for $20. At the same time, other people are trying to buy more things for the same exact reason.

This is the bare-bones basics of how price is discovered. The larger the market, the more easily the price is discovered.

 

Before investing, the questions you need to ask yourself are:

  • What are the uses of this thing in society?
  • Who wants to own this thing?
  • How scarce is this thing?
  • Will this thing hold value over time?
  • Are there potential undiscovered uses for this thing?