Bitcoin is a cryptocurrency that is nothing more than computer code that has been on the financial scene since 2009.
Some consider it a risky investment because it does not use the same traditional tools that are normally used for selecting an investment.
It can be thought of as a whole new way to trade.
However, it is currently very expensive.
Here are ten reasons for this.
Why Is Bitcoin So Expensive? (Top 10 Reasons)
1. Marginal Cost Of Production
Bitcoin transactions are documented on what is known as a blockchain.
This is a type of distributed database that has nodes of a computer network in common and is very expensive to operate when used in the capacity of cryptocurrency.
It exists as a digital format that stores electronic information of any variety but is most commonly used for transactions, much as a financial ledger is used at a bank.
Blockchains play one of the most important roles in cryptocurrency systems.
Without them, Bitcoin could not exist.
Their primary function is to work to maintain records of transactions that are not controlled by any bank, individual, or group of individuals.
This assures the security and fidelity of data records and generates trust among its users for each transaction without the need for third-party verification.
Usually, a database uses tables to sort out and structure electronic data.
However, a blockchain structures it into blocks that are electronically strung together.
All new data is entered into a new block until the block is at full capacity.
This chains the information together in chronological order, creating an irreversible, decentralized data timeline.
Again, decentralization in this context means that no single person or group, such as a bank, can control any transaction.
When a block becomes full, it becomes an irreversible part of this blockchain timeline and is given an exact time stamp.
A blockchain is part of Bitcoin’s production process and because of its structure, is difficult to implement, causing production costs to rise.
Bitcoin’s production costs play an important part in determining the cryptocurrency’s price.
Research shows that its price in crypto markets closely correlates with its marginal cost of production.
In economic terms, this reflects changes in the total production costs that come from producing or making one additional unit.
In other words, a company can earn maximum profits when its production reaches the point where the marginal revenue and marginal costs equal one another.
Marginal costs help a financial or other organization optimize its rates of production through economies of scale.
This is a crucial concept that is used in managerial accounting.
Economic models show that these marginal costs play crucial roles in determining Bitcoin prices, which challenge recent claims that the cryptocurrency is virtually worthless.
Even when markets price the cryptocurrency in the range of thousands of dollars each, its valuation remains robust.
Data show that price bubbles may appear from time to time in the Bitcoin market, but that rather than collapsing to zero, they tend to bound each time.
Bitcoin has both fixed and variable costs.
Fixed costs are the ones that remain constant, no matter the company’s levels of production.
These include block maintenance, mining, and other operational expenses.
Therefore, more production leads to lower fixed costs per unit, because the total is divided by additional units.
On the other hand, variable costs change according to the company’s levels of production.
In other words, the more a company produces, the more the variable costs.
2. Bitcoin Mining And Electricity Usage
Bitcoin mining is the process by which metaphorical miners use computer systems with special chips to solve various mathematical puzzles.
The miners use huge implements and massive machines to solve the mathematical puzzles that are generated by the Bitcoin algorithms to produce more Bitcoins.
This operation takes a lot of electricity to operate.
The power that runs a Bitcoin mining system usually runs 24 hours a day, 7 days per week, which can run up a huge electric bill.
This process uses as much or more electricity as some entire countries do, so the costs can be monumental.
Mining is a necessary part of maintaining the very transaction ledger that comprises the existence of Bitcoin.
The expense comes into play because of the controversial energy consumption that is consumed.
Environmentalists have been up in arms about it because they claim that it harms the environment.
Because of its monumental expense, energy consumption does play a role in why Bitcoin is so expensive.
3. Miner’s Fees And Rewards
The cost of Bitcoin is higher because of the miner’s fees and various rewards that are promised to Bitcoin miners as incentives to participate in the process of mining.
Additionally, they receive fees for all translations that are contained in a block of transactions that they have uncovered.
It is the job of Bitcoin miners to confirm and secure monetary transactions by adding new blocks to the blockchain (or groups of transactions).
It then becomes a shared public record.
No transaction becomes final until it has been added.
Miners are paid a fee for this service.
Miners assure the investors that monetary transactions using Bitcoin are confirmed in a timely manner.
Without these fees, a given transaction might take days or even weeks to become confirmed.
In fact, the network might reject the transaction altogether and return the funds unless a miner’s fee is utilized.
Rewards and miners’ fees are incentives for miners to participate in the Bitcoin system.
This adds to the expenses incurred by people who use Bitcoin.
As the cryptocurrency reaches its limit of $21 million, which is expected to take place in the year 2140, miners will be rewarded with fees for processing transactions that network users will pay.
These fees ensure that miners still have the incentive to mine and keep the network going.
The idea is that competition for these fees will cause them to remain low after halving events are finished.
4. Mining Systems
Mining systems add considerable cost to the Bitcoin phenomenon.
Desktop computers or gaming systems lack the efficiency to mine Bitcoin.
The mining process can heat these systems and can cause issues with bandwidth in home networks.
ASIC (Application-specific integrated chip) systems exist as customized computers for mining Bitcoin and are the primary infrastructure investment for miners of Bitcoin.
These machines can cost anywhere from $4,000 to $12,000, and even so, one ASIC system does not even generate one entire Bitcoin.
Therefore, the miners organize thousands of these machines into pools that run nonstop and that generate the 64-hexadecimal number that is needed to solve a Bitcoin hash puzzle.
5. Bitcoin Network Infrastructure
Another expense involved with Bitcoin is its network infrastructure.
Bitcoin network infrastructures entail expensive internet connections that must always be available, 24 hours a day, 7 days a week.
They cannot work properly if they have any interruptions.
All network connections need latency from other mining pools that are nearby and making that possible is an expensive endeavor.
These dedicated networks play the role of reducing dependency on external sources and ensuring that latency is minimized.
Even when a network goes offline, the transactions are continually being synced, which is a time-consuming process that causes the system to be prone to errors after the restoration of a connection.
The correction of these errors is also expensive, as computer engineers must be hired to do it, thus making Bitcoins more expensive.
6. Supply And Demand
Anything that is considered to be of value will lose that value if it is produced in unlimited quantities.
A valid reason for Bitcoin’s being as expensive as it lies in its limited quantities.
It’s all about supply and demand.
If an asset is in low supply, yet there is a high demand for it, the price will almost always grow.
If the supply, however, is higher than the demand for that asset, it results in a price drop.
A good example of this was the cost of gold in the late ’60s.
At that time, there was less demand for gold than there is now, and it cost around $40 an ounce.
Today, the demand is much higher and the supply has remained the same, so the price has risen to as much as $1,975.
Bitcoin supply has been capped at $21 million.
There will never be an amount larger than that.
It is neither being extracted nor increased.
The opposite is true.
According to estimates from two years ago, with 18 BTC existing, a portion of the coins are actually obsolete (i.e., dead).
A sizable amount of BTC was stolen in various computer hacks and acts of theft.
People who wish to increase Bitcoin’s value can purchase and hold Bitcoin and can increase the demand for it.
7. People Believe Bitcoin Is Expensive
This may sound like a strange reason Bitcoin is expensive, but it is true that its worth is partially determined by the fact that people believe it is worth a lot.
Buyers of Bitcoin believe that someday, Bitcoin will be worth a lot more than it is today and will, thus, be willing to pay more for it.
This is the same economic phenomenon that caused gold’s value to go from a reasonable $45 per ounce to the over $1,000 that it costs today.
Any type of currency is valuable simply because people consider it to be so, and because the country or society where it exists has decided to use it as an exchange medium that symbolizes something else.
It has no inherent value of its own since it is simply a computer code.
When the gold standard existed, it mandated that each dollar be backed with an amount of gold of equal value.
Today, the US dollar is not backed by gold or any other commodity.
It has value because society accepts that it has value.
For instance, you can take a $10 bill into a store and spend it on groceries.
In doing so, you spend your effort, your time, and have goods to take home with you, but the piece of paper upon which the $10 symbol is printed has no inherent value whatsoever.
The same is true of Bitcoin.
8. Transaction Fees
Another factor that makes Bitcoin so expensive is the fact that to validate a transaction using this type of cryptocurrency, one must pay a hefty transaction fee.
The amount of the fee is measured by the average fee in US dollars when a cryptocurrency transaction is processed by a Bitcoin miner and confirmed.
These fees can spike when trading in a congested network.
This happened in 2017 when cryptocurrency was booming and the fees reached almost $60 per transaction.
Transaction fees for Bitcoin are currently 2.141, which is up from 1.575 and down from 7.365 a year ago.
This means a change of nearly 35.93% from yesterday and -70.94% from 2021 numbers.
9. Bitcoin Is Decentralized
The decentralization of Bitcoin is one of its most important aspects, but this also causes it to be more expensive than other types of monetary transactions.
Decentralization is an expensive feature of Bitcoin because the blockchains that are willing to compromise on it can offer Bitcoin users a better range of functionality.
Therefore, users are charged more to implement it.
Without decentralization, Bitcoin would lose one of its most attractive and important features: the quality of being censorship-resistant or used without permission.
These things enable anyone at all to use the Bitcoin network and are highly-prized assets that come at a premium price.
The main point of a decentralized cryptocurrency blockchain is to provide an immutable ledger with non-discriminatory participation.
Decentralization is the only method of attaining a network that has these qualities.
The danger lies in that this type of network can be used nefariously, such as in money laundering, and that, by nature, cannot be regulated.
10. Limited Acceptance
While Bitcoin is accepted by a growing number of businesses, it is still not universally accepted.
In fact, most stores do not accept it yet.
Once it is, according to economists, it will be less expensive.
However, for now, many people are still unaware that it exists, even though its acceptance in business practices is growing each day.
Building Bitcoin payment workflow demands expensive, time-consuming technological prowess.
This expense is reflected in the cost of the cryptocurrency.
Although businesses are provided with fast ways to begin accepting crypto payments.
Businesses are required to submit information about themselves in the Bitcoin application.
This eliminates the Bitcoin aspect of anonymity and is a reason more businesses are not participating.
This keeps prices high.
The volatility of Bitcoins that are in circulation and the number of businesses using them are comparatively very small compared to what is one day projected to be.
This makes it possible for small events, business activities, and trades to significantly affect their prices, which can rise overnight in some circumstances.
Part of the cryptocurrency’s limited acceptance is based on the fact that the software that powers the world of Bitcoin is still in beta mode and has many features that are incomplete.
Not features but services, ad tools are being developed to make the cryptocurrency more accessible and secure, but some of them are not yet available to the public.
Most businesses that trade in Bitcoins are new and do not offer any insurance.
Bitcoin is still in the process of maturing, and until that time, causes its buyers to incur expenses that they will most likely not have to incur later on.
Businesses that accept Bitcoin must pay more to rely on a cloud system, such as Xero or QuickBooks, and need to hire accountants to be able to determine if crypto payments software tools integrate with it.
The cryptocurrency is fraught with added expenses that some businesses might not want to take on, thus keeping prices higher for investors.
There are also potentially expensive tax implications involved, especially for any business that hopes to hold on to any of the cryptocurrency received.
Another consideration for businesses considering acceptance of Bitcoin is the aspect of how information from commercial establishments’ POS (point of sale systems) are accessed by their accountants.
Some involve expensive reworking, and although it could be a one-time charge, it does not come inexpensively.
Other Ways In Which Bitcoin Might End Up Costing You More Money
Bitcoin does not offer any type of consumer protection, such as insurance.
This means that in its attempt to free people to perform transactions on their own terms, certain safety and security issues might not be acceptable to all Bitcoin participants.
There is a possibility that private insurance services could be developed for this service and will not come without high price tags, and it is uncertain whether they will be available at all.
Unlike US dollars, Bitcoin does not have any type of protective government regulations.
This cryptocurrency is an entirely unregulated entity.
Transactions are not legally protected, and it is difficult, if not impossible, to rectify any type of third-party misdeeds that might occur in any third-party transaction.
That means Bitcoin users could unexpectedly lose their investments over issues that would otherwise be covered under governmental regulatory systems.
Additionally, there is no guarantee of any type of minimum valuation of Bitcoin.
Therefore, if a large group of investors decides to withdraw their use of Bitcoins and further opts to sell them, the value could suddenly decrease by significant amounts without warning.
This would be especially detrimental to users who own large amounts of cryptocurrency.
Another possibility of losing money with Bitcoin lies in the fact that all transactions are irreversible.
This can be harmful to consumers by virtue of the fact that all transactions are unregulated, anonymous, and lack security.
Each transaction that is performed is permanent.
This means that if something goes wrong, there is no regulatory entity that can reverse the situation.
This can put investors at risk of losing their entire investment should they lose access to their private key.
In the case that a hard drive crashes or records are corrupted by a virus, it is possible to lose accessibility to one’s funds or end up being gone altogether within a matter of a few minutes.