The cryptocurrency market saw a lot of investment in the form of Bitcoin by tracking its performance over a long period of time.
Investors strongly believe that it is safeguarded by Blockchain as a result of this influence. A wonderful pair of investments are there in this combo.
Since its introduction to the financial world in 2009, Bitcoin has existed as a cryptocurrency that is nothing more than computer code.
Because it doesn’t employ the conventional tools that are typically used to choose investments, some people view it as a dangerous investment. It can be viewed as an entirely new method of trading. However, the cost is rather high right now. Ten justifications are provided below.
Why is Bitcoin So Expensive? (Top 10 Reasons)
1. Marginal Cost of Production
A blockchain is a public record of all bitcoin transactions. When utilized as a cryptocurrency, this sort of distributed database uses shared nodes from a computer network and has a high operating cost.
Similar to how a financial ledger is used in a bank, it exists as a digital format that keeps electronic information of any kind but is most frequently used for transactions. One of the most crucial roles in cryptocurrency systems is played by blockchains.
They are essential for Bitcoin to exist. Their main duty is to keep track of transactions that are not under the control of any bank, person, or group of people.
Without the need for third-party verification, this ensures the confidentiality and authenticity of data records and fosters trust among its users for every transaction.
Tables are typically used in databases to organize and sort electronic data. However, a blockchain organizes it into blocks that are connected electronically. A new block is filled with all new data until it is completely full.
This creates a decentralized, irreversible data chronology by connecting the information in chronological order. Once more, in this context, decentralization means that no single person or entity, like a bank, may control any transaction.
A full block acquires an accurate time stamp and becomes an irrevocable component of the blockchain chronology. A blockchain is a component of the creation of Bitcoin, but due to the way it is structured, it is more expensive to produce.
The price of Bitcoin is significantly influenced by the cost of producing the cryptocurrency. According to research, the price of a cryptocurrency closely reflects its marginal cost of production.
This changes the total production expenses that result from making or producing one extra unit, in terms of economics. To put it another way, a business can make the most money when its output reaches the point where marginal income and marginal costs are equal.
Through economies of scale, marginal costs assist a financial or other institution in maximizing its rates of output. This fundamental idea is applied in managerial accounting.
Economic models refute previous assertions that cryptocurrency is essentially worthless by demonstrating that these marginal costs play significant roles in influencing Bitcoin pricing.
The cryptocurrency’s valuation is still strong even when it trades for thousands of dollars per unit. According to data, there may occasionally be price bubbles in the Bitcoin market, but they never tend to burst, instead continuing to rise.
Bitcoin costs are both constant and fluctuating. No of the level of production for the company, fixed costs are the same. These cover mining, block upkeep, and other operating costs. Because the total is divided by more units, more production results in reduced fixed costs per unit.
Variable costs, on the other hand, fluctuate based on the company’s output levels. In other words, a company’s variable costs increase in proportion to its output.
2. Bitcoin Mining and Electricity Usage
The method of mining for bitcoin involves using computer systems equipped with unique chips to solve different mathematical puzzles.
For the purpose of creating more Bitcoins, the miners employ enormous tools and powerful processors to solve the mathematical riddles produced by the Bitcoin algorithms.
It uses a lot of electricity to run this activity. A bitcoin mining system often uses power 24 hours a day, 7 days a week, which might result in a hefty electric cost.
The costs associated with this procedure can be enormous because it consumes as much electricity as some entire nations do. The transaction ledger that underpins the very existence of Bitcoin must be kept up through mining. The cost is a factor because of the contentious energy usage that is made.
Because they believe it affects the environment, environmentalists are outraged about it. Energy use does contribute to Bitcoin’s exorbitant cost, which is why it is so expensive.
3. Miner’s Fees and Rewards
The miner fees and other benefits that are provided to Bitcoin miners as inducements to engage in the process of mining are the main reasons why the price of Bitcoin is increasing. Moreover, they are paid for each translation that is part of a block of transactions that they have discovered.
By adding new blocks to the blockchain, Bitcoin miners’ task is to validate and protect financial transactions (or groups of transactions). Following that, it becomes a shared public record. Only when it has been added does a transaction become final.
For this service, miners receive payment. Investors can have faith in miners to confirm bitcoin-based financial transactions on schedule. If these fees weren’t charged, a particular transaction would take days or even weeks to become confirmed.
In fact, if a miner’s fee is not applied, the network may reject the transaction entirely and return the money. Miners are encouraged to take part in the Bitcoin system through rewards and miners’ fees. As a result, those who use Bitcoin incur additional costs.
Miners will receive fees from network users for processing transactions as the cryptocurrency reaches its limit of $21 million, which is anticipated to happen in the year 2140.
The network is kept running by these fees, which guarantees that miners still have a reason to mine. The theory behind this is that once the halving events are over, the fees will still be low due to competition.
4. Mining Systems
The Bitcoin phenomenon is extremely expensive because of mining systems. It is inefficient to mine Bitcoin on desktop PCs or gaming consoles. These systems may become too hot from the mining operation, and home networks may experience bandwidth problems.
ASIC (application-specific integrated chip) systems are specialized computers that are used to mine bitcoins. They represent the main infrastructure investment for bitcoin miners.
Even though one ASIC system does not even produce one complete Bitcoin, these devices can cost anywhere from $4,000 to $12,000.
Consequently, the miner groups thousands of these devices into pools that operate continuously and produce the 64-hexadecimal number required to crack a Bitcoin hash puzzle.
5. Bitcoin Network Infrastructure
Bitcoin’s network infrastructure represents yet another cost. Expensive internet connections are required for the infrastructures supporting bitcoin networks, which must operate constantly, round-the-clock, every day of the week. Any interruptions prevent them from operating effectively.
It costs money to make it possible for all network connections to access nearby mining pools’ latency. By lowering reliance on outside sources and ensuring that latency is kept to a minimum, these dedicated networks serve to reduce dependency.
The transactions are constantly being synced even when a network goes offline, which is a time-consuming process that makes the system prone to errors after the restoration of a connection. Bitcoins become more expensive as a result of the high cost of hiring computer engineers to correct these errors.
6. Supply and Demand
Anything that is thought to have value will become worthless if it is produced in an endless amount. The fact that there are so few Bitcoins available is a legitimate explanation for its high price. Everything is based on supply and demand.
An asset’s price will nearly always increase if there is a high demand for it and a short supply of it. However, if there is a surplus of that asset relative to demand, the price will decline. The price of gold in the late 1960s is a good illustration of this.
Gold cost roughly $40 an ounce back then when there was less demand for it than there is now. Because of the increased demand and unchanged supply, the price has increased to as much as $1,975.
The total supply of bitcoins is limited to $21 million. There isn’t going to be anything bigger than that. It is not being increased or extracted. Contrarily, this is real. With 18 BTC already in existence, estimations from two years ago suggest that some of the coins are already obsolete (i.e., dead).
Several computer intrusions and thefts resulted in the loss of a sizeable quantity of BTC. Those that want to raise the value of Bitcoin can buy it, keep it, and raise interest in it.
7. People Believe Bitcoin is Expensive
This may seem like an odd justification for Bitcoin’s high price, but it is true that the value of Bitcoin is in part based on how much people value it. Bitcoin buyers are prepared to pay more for it because they think that in the future, Bitcoin will be worth much more than it is right now.
The rise in gold’s price from a reasonable $45 per ounce to its current price of over $1,000 is the result of the same economic phenomenon.
Any form of money has value simply because people believe it to be valuable and because the nation or society where it is used has chosen to use it as a means of exchange that stands for something else.
Being merely a piece of computer code, it has no inherent value. Each dollar had to be backed by an equivalent amount of gold when there was a gold standard, which was in place at the time.
At the present, neither gold nor any other commodity is used to support the US dollar. Society acknowledges its value, so it must have value. A $10 bill, for instance, can be used to buy groceries when you enter a store.
However, the piece of paper bearing the $10 symbol has no intrinsic value whatsoever. You spend your time and effort in doing so, and you end up with goods to take home. Similarly, Bitcoin is real.
8. Transaction Fees
Another element that contributes to Bitcoin’s high price is the significant transaction fee that must be paid in order to validate a transaction using this kind of money.
The amount of the fee is determined by the typical fee in US dollars charged by a Bitcoin miner to process and confirm a bitcoin transaction.
These costs may increase when trading over a busy network. This occurred in 2017, a boom year for cryptocurrencies when transaction costs topped $60.
The current Bitcoin transaction cost is $2.141, up from $1.575, but down from $7.365 from one year ago. This translates to a decrease of -70.94% from 2021 numbers and a drop of almost 35.93% from yesterday.
9. Bitcoin is Decentralized
One of Bitcoin’s most crucial features is its decentralization, but this also makes it more expensive than other kinds of financial transactions. Because the blockchains that are ready to compromise on it may provide Bitcoin users with a wider range of functionality, decentralization is a costly aspect of Bitcoin.
Users must pay extra to implement it as a result. Without decentralization, one of Bitcoin’s most desirable and significant characteristics would be lost: the ability to be censorship-resistant or utilized without authorization.
These are highly sought-after assets that fetch a high price since they make it possible for anybody to use the Bitcoin network. A decentralized cryptocurrency blockchain’s primary goal is to offer an immutable ledger with open participation.
In order to create a network with these characteristics, decentralization is required. The risk comes from the fact that this kind of network, by its very nature, cannot be regulated and can be used for evil purposes, such as money laundering.
10. Limited Acceptance
Although more businesses are accepting Bitcoin, this acceptance is still not complete. Most shops don’t even accept it yet, in reality. Economists predict that once it is, it will cost less.
Even though its use in business practices is becoming more and more common, many people are still unaware of it as of yet. It costs money and takes a lot of time to build a Bitcoin payment workflow.
The cost of the cryptocurrency accounts for this outlay. Despite the fact that companies are given quick ways to start accepting cryptocurrency payments. Businesses must fill out their own information in the Bitcoin application.
As a result, the anonymity feature of Bitcoin is no longer present, which is why fewer companies are using it. Costs remain high as a result. The volatility of Bitcoins currently in use and the number of businesses using them are comparatively very low compared to what is one day anticipated to be.
This makes it possible for little things like business transactions, trades, and other occurrences to have a big impact on their prices, which in some cases can increase suddenly. The fact that the software underlying the Bitcoin ecosystem is still in beta mode and lacks many features contributes in part to the cryptocurrency’s modest adoption.
Ad tools, not features or services, are being created to increase the usability and security of cryptocurrencies, albeit some of these are not yet accessible to the general public. The majority of companies that deal in bitcoins are brand-new and do not provide any insurance.
Due to the fact that bitcoin is still developing, purchasing it now will likely result in costs that you won’t have to pay later.
Businesses that accept Bitcoin must pay more to rely on a cloud system, like Xero or QuickBooks, and must employ accountants in order to determine whether crypto payments software tools integrate with it.
Because cryptocurrency carries a number of additional costs that some firms might not want to assume, prices for investors are kept high. Furthermore, there may be significant tax repercussions, particularly for any corporation hoping to keep any received cryptocurrency.
The issue of how accountants at commercial venues get data from their POS (point of sale) systems is another factor for firms thinking about accepting Bitcoin. Even though it might be a one-time fee, some require costly reworking, which is not something you can get for free.
Other Ways in Which Bitcoin Might End Up Costing You More Money
There is no consumer protection provided by bitcoin, such as insurance. This implies that certain safety and security concerns might not be acceptable to all Bitcoin participants in its attempt to liberate people to carry out transactions on their own terms.
Private insurance services might be created for this service, but it’s not clear if they will be offered at all. They would likely cost a lot of money and might not even be offered. Bitcoin does not fall under any protective government regulations, unlike US dollars.
This cryptocurrency is an unregulated business in every way. Transactions are not legally protected, and any type of third-party wrongdoing that might occur in any third-party transaction is difficult, if not impossible, to correct.
Because of this, users of Bitcoin may unintentionally lose money on investments related to problems that are typically handled by governmental regulatory systems. Furthermore, there is no assurance that Bitcoin will be valued at a certain minimum.
Therefore, the value may abruptly drop by sizeable amounts without prior notice if a sizable group of investors chooses to stop using Bitcoins and then decides to sell them. Users who possess significant cryptocurrency holdings would particularly suffer from this.
The fact that all Bitcoin transactions are final increases the chance of financial loss. Due to the fact that all transactions are unregulated, anonymous, and lacking in security, this may be harmful to consumers.
Every action that is taken has a permanent effect. This implies that if something goes wrong, no regulating body can make things right. If investors lose access to their private key, they run the danger of losing everything they have invested.
It is possible to lose access to one’s funds or have them completely disappear in a matter of minutes in the event that a hard drive crashes or records become corrupted by a virus.
According to estimates, Bitcoin and Blockchain are fundamentally related in the cryptocurrency world because they were both created at the same time.
As blockchain was made public shortly after the invention of Bitcoin. The internal standards of Bitcoin are quite detailed and must be adhered to strictly under protected circumstances.