Bitcoins have become increasingly expensive over the past decade, with prices rising from just a few cents in 2010 to over $20,000 per bitcoin today. There are several key factors that have driven up the value of bitcoins and made them so costly compared to traditional currencies.

Limited Supply

One of the main reasons bitcoins are so expensive is their intentionally limited supply.

There will only ever be 21 million bitcoins created. This hard cap makes bitcoins scarce and increases their value over time as demand grows.
With fiat currencies like the US dollar, central banks can print new money into circulation, reducing its scarcity and value through inflation. The bitcoin supply is not controlled by any central authority.
Of the 21 million supply cap, over 18 million bitcoins have already been mined. As we get closer to reaching the limit, mining new bitcoins becomes more difficult and rewards are halved, ensuring increased scarcity.

Growing Adoption and Demand

While the supply of bitcoins is tightly controlled, the demand has been rapidly growing, especially over the past few years. This growing gap between limited supply and increasing demand drives up the value of existing bitcoins.

More individuals, businesses, and institutional investors have been buying bitcoins as it gains legitimacy. Major companies like Tesla and MicroStrategy hold bitcoins on their balance sheets.
Bitcoin is gaining traction for payments and as a store of value around the world, particularly in emerging markets with weaker local currencies.
Media hype and “fear of missing out” further increases interest and speculation as prices climb higher. This heightened demand places upward pressure on prices.

Perceived Value and Speculation

Bitcoins lack any underlying physical value. Their price is based entirely on perceived value from supply and demand in the market. This makes bitcoin valuations highly speculative and volatile.

Investors speculate on future scarcity and demand increases, betting that bitcoin prices will continue appreciating over the long-term.
Each price milestone (such as $10k, $20k) further raises perceived value and draws media hype, fueling further speculation and demand.
Major price swings are often emotionally driven rather than based on rational valuation models, especially during bull and bear market cycles. Fear of missing out drives prices up, while fear of losing drives prices down.

Development Milestones

Bitcoin’s technology development has progressed over time, improving functionality and legitimizing it more as an asset class. Major technology milestones also influence price.

Improvements like SegWit increased transaction capacity, and the Lightning Network enabled faster/cheaper payments.
Institutional-grade infrastructure like custody solutions and futures markets made bitcoin more viable for major investors.
Each halving event cuts mining rewards in half, increasing scarcity. Halvings lead to speculation and price climbs.

Challenges to Get Bitcoins

It takes considerable time, technological sophistication, and resources to acquire bitcoins, which contributes to their expense.

There are high friction costs:

Need to understand complex digital wallet and storage technologies
Fees charged by exchanges to buy and sell
Network fees for moving bitcoin between wallets/addresses

There are hardware requirements:

Powerful PCs needed for lucrative bitcoin mining operations
Specialized mining equipment costs thousands of dollars

There’s a steep learning curve:

New users need months to learn secure practices
Advanced tech skills required to keep bitcoins safe

This makes it difficult and expensive for the average person to get started with bitcoin, limiting supply availability.

Built-In Deflation

Bitcoin was designed to increase in value over time through built-in deflation. It incentivizes holding rather than spending.

Mining rewards (new supply) reduce by 50% every four years. This constrained supply growth results in deflation.
Knowing supply will keep dropping as demand rises encourages holding bitcoins as an appreciating asset, rather than using them transactinally.
Built-in scarcity makes bitcoin more attractive as a long-term store of value than currencies prone to inflation when central banks print more.

Perceived Anonymity and Illicit Use

Bitcoin’s pseudonymous nature makes it appealing for illegal activities like money laundering, tax evasion, etc. This illicit use inadvertently increases mainstream prices.

Nefarious actors are willing to pay premiums to use bitcoin for black market commerce and moving money outside the law.
Increased regulatory scrutiny tries to crack down on this, but it remains an issue, especially on the dark web.
While not an intended use case, illegal use increases bitcoin demand and makes them more valuable.

Network Effects

Bitcoin’s valuation feeds on itself in a network effect. The more value bitcoin accumulates, the more legitimacy it gains as an asset class, which further drives up demand and prices.

Value growth leads to:

Increased media and investor attention on price milestones
Mainstream adoption as a payment network and store of value
Viral growth as new users rush to join a seemingly appreciating asset
Validates that past price increases were warranted
Speculation that growth trends will continue into the future

This cycle repeats with each market cycle and price record broken. As the undisputed first cryptocurrency, bitcoin benefits most from these network effects.

Conclusion

A combination of deliberate supply controls, growing adoption, speculation, challenges acquiring bitcoin, built-in deflation, illicit use cases, and self-reinforcing network effects make bitcoin increasingly expensive compared to fiat currencies.

While volatile price swings occur, bitcoin’s long-term appreciation results from clear economic advantages hardcoded into its decentralized design. As global awareness and demand for scarce digital money continues growing, bitcoin prices will likely keep setting new records into the foreseeable future.

Why Are Bitcoins So Expensive?