The value of every asset depends on two things, supply and demand. There are hundreds of potential reasons that will affect one of these two but the value comes from the relationship between supply and demand.
What are supply and demand?
Let’s use an example from everyday life.
For example, you want to buy an apple. There is only one store that sells apples in your city. So, the supply is pretty low. The number of people that are buying apples is roughly the same all the time. The fact that there is only one store that sells apples gives us a clear sign that the demand is high.
Low supply and high demand lead to higher prices. The owner is able to charge you more because he doesn’t have a competition. If you want to buy an apple, you have to buy from him at a higher price or go to another city that is pretty far. You do not have a lot of choices.
Even if the price is high, it is still cheaper to buy there than to go to another city just for apples.
What does happen if supply increases?
Suddenly, 4 more stores that are selling apples are being opened. It means that supply in the whole city is now higher. The demand is still the same because the number of citizens that are buying apples is almost the same as it was before.
Higher supply and the same demand is going to lead to a decrease in price because you have a choice. The owners will try to offer the best deal and that’s why they will have to lower the price.
The same principle worth for any asset that is known today. If the city has one doctor, the supply will be very low while the demand will be pretty high. Sooner or later everyone will need some help.
Low supply or scarcity will always lead to higher prices.
The more scarce something is, the more expensive it is.
Why Gold is so expensive?
One reason is that it looks beautiful but scarcity is the main reason why the price is so high. Also, it takes time and money to mine and refines those beautiful coins the same way it takes time and money (equipment and electricity costs) to mine Bitcoin.
On the other side, it takes nothing to print fresh money into the economy and they’re doing it more frequently. Just in 2020, the US printed more than $6 trillion in order to save the economy. It has short term benefits but in the long term it decreases the value of the currency and that process cannot be reversed.
New printing can help to a certain extent until it increases the money supply to an extent when new printing doesn’t make a big difference. At that point, the economy is facing bankruptcy and more and more countries are going there or they’re already there.