Cryptocurrencies, unlike the dollar, euro, pound, and other government-backed currencies are not officially supported by any central bank or government. The currency has traditionally been traded in an open marketplace similar to the stock market, where buyers and sellers can exchange their local money for bitcoin or vice versa.
Just over a decade ago, Bitcoin traded for less than $1. Bitcoin surpassed $65,000 in 2021, and despite the recent dip, investors are bullish on the asset.
But who and what determines the price of Bitcoin and other cryptocurrencies, and does it have real value?
The monetary policy instruments, inflation rates, and economic growth measurements that generally affect the value of a currency do not apply to Bitcoin because it is neither issued by a central bank nor backed by a government.
Bitcoin is like a commodity, the price of a bitcoin depends on how much a buyer is willing to pay, similar to how the price of gold, oil, sugar, grains, and other commodities is established by the market. Like any market, Bitcoin is primarily governed by the laws of supply and demand.
Nobody, in particular, sets the price of bitcoin, nor can we trade it in one place. The price of each market or exchange is determined by supply and demand.
Prices will likely rise if more people want to buy than sell. The price tends to fall when there are more sellers. This is comparable to the stock market, real estate, and the majority of other open marketplaces.
More Demand, Less Supply = Price Goes Up
More Supply, Less Demand = Price Goes Down
It is because the price of a bitcoin is extremely volatile, and it’s not just the Bitcoin exchange rate that fluctuates, many things, such as stocks, fiats, oil, and many other products, can be quite volatile, moving dramatically up and down against a base currency (such as the US dollar).
Cryptocurrencies, like stocks and commodities, are generally tradable assets. Their price is determined by how much interest there is in buying them on the market (called demand) and how much is available to buy (called supply). The relationship between the two determines the price.
If there is a high demand for a particular coin but the available supply is limited, the price rises. The demand for coins sometimes rises regardless of the currency’s true value; this is termed overbought. Alternatively, if a significant quantity of a coin is sold without a solid reason, it is described as oversold.
The usefulness of Bitcoin as a store of value is determined by how well it functions as a medium of exchange. If Bitcoin does not succeed as a medium of exchange, it will be ineffective as a store of value. Speculative interest has been the primary driver of Bitcoin’s value for much of its history.
All previous economic analyses of Bitcoin attempted to understand it through the lens of monetary economics and concluded that it behaves more like a speculative asset than a genuine currency.
Bitcoin's future is widely regarded as uncertain. While the value of Bitcoin may rise above $100,000, it may also fall below zero.
The most significant single factor that could influence Bitcoin’s price is likely to be government action. Regulatory agencies in the United States and around the world may enact new laws or regulations that severely limit or outright prohibit Bitcoin.
Bad news about cryptocurrency also reduces adoption. Geopolitical events and statements by governments regulating bitcoin are among the news stories that scare Bitcoin users.
Outside influences can also drive up Bitcoin prices. Tesla CEO Elon Musk’s Tweets, for example, have influenced cryptocurrency market prices. Catherine Wood, CEO of Ark Invest, is another prominent Bitcoin supporter who may help steer the market upward. Furthermore, early investors who have amassed a significant bitcoin holding, dubbed bitcoin whales, can swing the markets by engaging in a large transaction.
Photo Source: CoinDesk, 2018.
It is critical to recognize that investing in Bitcoin is extremely volatile and risky. While you could buy Bitcoin and profit handsomely, there are significant risks of loss. Most people should limit their Bitcoin investments to funds they can afford to lose.
Bitcoin broke the $1 mark in April 2011, launching its first mini-bull run. It increased by roughly 3,000% over the next three months, reaching a high of between $29 and $32 (depending on the source) by June 2011. By November 2011, the price had fallen back to $2.
Photo Source: BusinessToday, 2022.
Limited Supply: Bitcoin has a maximum supply of 21 million coins. There will never be more than 21 million Bitcoins in existence. According to many experts, the limited supply, or scarcity, contributes significantly to Bitcoin’s value.
Cannot be copied: No one can forge a Bitcoin because it operates on a secured blockchain ledger.
Simply put, the price of Bitcoin rises when there is a greater demand for it, and it falls when there is less demand.
When all Bitcoins have been mined:
Based on Bitcoin’s predictable issuance model, the final coin will be mined sometime around 2140.
Also published here.