Short answer: the collective beliefs of buyers and sellers. 

Shorter answer: One BTC is equal to … one BTC.

But let’s dig a little deeper.

Brought into existence by networks of computational power, Bitcoin (BTC) is the first, largest, and best-known cryptocurrency

At the time it was invented by the pseudonymous person or entity known as Satoshi Nakamoto – who first floated the concept of a peer-to-peer electronic cash system in an October 2008 academic research paper – the world’s financial system was in deep trouble. 

Trust among counterparties disintegrated as big institutions like Lehman Brothers toppled over, insolvent. And central bankers began to print money like it was going out of style. 

Meanwhile, people needed a way to pay for things online – without having to rely on any third parties.

Put yourself in the shoes of someone inventing a new form of currency – how’s that going to work? Of course, it should be digital. And it should not be “fiat” (meaning “because we said so”) because of the temptation to keep the printing press switched to “On.” Ideally, supply would be finite. So it should be digital, trustless, and inflation-proof – but how to accomplish all three goals? Peers would govern it – BTC thus became the singularly perfect use-case for blockchain protocols. (Internet protocols – turn signals, rules of the road – are what makes browsers work, by way of comparison).

“We define an electronic coin as a chain of digital signatures,” the 2008 Nakamoto white paper said. “The network is robust in its unstructured simplicity … nodes work all at once with little coordination.” 

On the new Bitcoin peer-to-peer network, honesty was optimal i.e. verified nodes would dominate global CPU power, while tampering with honest nodes carried no upside. Participants used proof-of-work to record transactions.

Such an ingenious e-cash system has to be worth something, right? Not necessarily. But as it turns out, yes, BTC is the most successful digital financial asset ever created. Its capitalization is closing in on $1 trillion. 

If you ever plucked a mint condition 1971 Eisenhower Silver Dollar out of an attic shoebox and thought, “well, I could use this to buy a cup of coffee – or I could hold on to it,” then you can begin to grasp bitcoin (with a lower case “b,” because we’re talking explicitly about the token and not the blockchain protocol, Bitcoin with a capital “B.”)

Today, roughly 18 million bitcoin tokens exist. Mining will continue until there are 21 million BTCs in circulation. Because by design miner rewards get cut in half roughly every four years, getting to the full supply is going to take about another 20 years. 

To recap: there’s a finite supply of BTC, the pace of new coins entering circulation is slowing, demand for them is growing, digital exchanges (some 250 of them globally) are proliferating. 

And so it is here, on exchanges, that BTC’s price is determined – by the collective beliefs held by buyers and sellers.