The price of any cryptocurrency can be quite a volatile thing, so ensuring you’ve got a good grasp on ways to assess and interpret Bitcoin’s price is vital for profit maximization.

Converting from BTC to USD as seen on Binance, Forbes and Yahoo Finance for example, the price of the coin has massively increased over time. While the current price is well into the tens of thousands of dollars, the initial value of the coin to be around $0.0009! So, with such a variance in value, how can you assess the price in a useful way?

Consider The Market Metrics

This is perhaps the most boring method on this list, but the reason that it’s worth considering is that it’s very effective, and market metric analysis has been done for a long time.

Generally speaking, any cryptocurrency will have three important factors to consider: market capitalization, trading volume, and supply.

Market Cap

Judging anything by the market cap alone is a very reductive way to make a decision. However, if you’re new to Bitcoin and want to understand a thing or two in short order, look at the market cap. Generally, a market cap of over $1 billion is considered to be less risky, since they have a much higher value potential.

Since Bitcoin has a market cap in the thousands of billions, it’s safe to say that it passes this metric.

Trading Volume

The trading volume is a representation of how much of the currency is being traded back and forth on any given day. The higher this trading volume is, the more likely you’re looking at a currency with more liquidity and price stability.

Supply

Since the supply of Bitcoin is controlled, understanding the rate at which new Bitcoins are minted helps you to gain an idea of the currency’s scarcity. In turn, this gives you an idea of how valuable it is relative to other items, and their scarcity.

Consider Production Costs

The production costs of Bitcoin have increased and decreased a lot with time, largely because the price of the power required for the calculations has no fixed value.

However, the value of Bitcoin has been consistently above the production cost of the coin for many years. This is a simple trend, and it’s one that’s likely to continue into the future.

Generally speaking, the average cost of energy around the world is increasing. This is due to a number of factors, from the limited availability of fossil fuels to the increased demand making it harder to supply so many users.

The silver lining of this fact is that since Bitcoin’s value has essentially never dropped below its production cost, it’s a fairly reliable trend.

Consider Bitcoin Holders’ Conviction

While the behavioral sciences are not as rock solid as people like their financial decisions to be, taking a person-oriented approach to understanding the value of Bitcoin can allow you to interpret the cost in an interesting way.

The reason for this is that Bitcoin, despite being largely decentralized, does still conform to some market trends. For instance, during a bear market, the number of long-term Bitcoin holders tends to increase. On the other hand, during a bull market, the number of these holders tends to decrease.

It’s not entirely clear why this is the case, but the perceived value of Bitcoin does have an impact on its objective value. The trend outlined above indicates that when Bitcoin is largely held by short-term speculators, its value is overestimated. Of course, this is also true in reverse.

Therefore, the conviction of Bitcoin holders is worth paying attention to. Staying plugged into social media and news sites to understand their approach to the market mindset can help you gain vital insight.

Compare To Similar Assets

Perhaps the most useful way to value Bitcoin is to compare the price with assets that share some characteristics. A great example of this is gold – both gold and Bitcoin are fixed-supply, and counterparty-free. They are both also used as long-term safe havens for funds by a number of different traders.

So, using gold as a comparison, consider the value of Bitcoin. The best way to do this is through the market cap of gold, which is around $11.5 trillion. This is quite a hard limit since there is only so much gold that can be dug up around the world.

If Bitcoin were to reach the same market cap as gold, the price per coin would also increase commensurately, to over $500k.

If this wasn’t alluring enough, the market cap of Bitcoin may be different from that of gold. After all, Bitcoin is decentralized and has no government interference. This can mean that the market cap might not stop at gold’s $11.5T, and instead continue to rise, with the price of each individual coin also continuing to rise.

While the value of Bitcoin is a highly changeable and complex thing, there are certain methods that you can use to determine the value in a way that will be useful to you. Always remember, though, that the true value of Bitcoin will be achieved by the open market: the price is what someone is willing to pay for it.