The price of bitcoin is primarily determined by supply and demand.
Other factors can influence the price of bitcoin, such as regulations and reputation.
The price of bitcoin (BTC) is a topic of great interest, especially considering that in November 2021 it reached a new all-time high, exceeding USD 68,000. But you may wonder what are the factors that determine its price.
Bitcoin is a decentralized currency, and its value depends on supply and demand, which we will explain in detail later. Now, there are other factors that also play a role. To understand how the price of bitcoin is determined, let’s first look at some key details about how the network works.
What you should know about the Bitcoin network
Bitcoin reaches its all-time high: exceeds $ 66,000 thanks to the first exchange-traded fund in the United States
If you have wondered how exactly the Bitcoin network works, you are not the only one. And understanding this is important when investing in cryptocurrency. As we told you before, Bitcoin is a fully decentralized monetary system, so no central authority issues this asset. So how is bitcoin issued?
This is where mining comes into play. The role of this process is vital to the existence of bitcoin and other cryptocurrencies. Thanks to mining, transactions are validated and grouped on the network And then they are added to a kind of ledger, which is known as a blockchain.
Miners are in charge of validating transactions by solving a series of cryptographic puzzles. The first to manage to mine a block will be the one who receives the reward. About every ten minutes a new block is added to the blockchain. Only then is it possible for new coins to be generated.
Since Satoshi Nakamoto mined the first block, known as the Genesis Block, all transactions on the Bitcoin network follow the same process unalterably. However, every four years or so there is a change in the amount of reward miners receive per block; currently it is 6.25 BTC. This event it is known as halving, and it also influences the price of bitcoin.
It is a process in which miner rewards are halved when validating blocks. In the case of Bitcoin, the halving occurs every 210,000 mined blocks. This will continue to happen until the network does not generate any more coins.
After each halving, the value of bitcoin tends to increase, Like it shows Ecoinometrics. The first was in 2012, causing the price to go from $ 11 to $ 1,000 in just one year. Then, in 2016, it increased from $ 430 to $ 1,000 at the end of the year, according to CoinMarketCap. The last halving was in 2020. That same year its value went from USD 5,000 to almost USD 30,000.
Supply and demand, a key factor
Like other assets, the price of bitcoin is regulated by the law of supply and demand. In simple terms, the higher the demand, the higher its price, and the opposite also applies. Demand is the amount of goods and services that consumers want to purchase at a given time. On the other hand, the supply is the amount of goods or services that are available to buy in the market.
So the market regulates itself. Everyone who participates in the sale of bitcoin determines its value to some extent. Thus, its price will depend on how much users are willing to pay. This can be clearly perceived on trading platforms, where a person proposes a price and, if the counterparty accepts it, the transaction is carried out.
Other factors influencing the price of bitcoin
Although bitcoin is a currency that does not depend on any government due to its decentralized nature, its price is vulnerable to government measures that affect it directly. This was the case in China, when it announced in May 2021 a series of restrictions to curb cryptocurrency mining.
As shown in a company report Coin Metrics, the price went from USD 45,000 to USD 30,000 a few days after the announcement of the Chinese government. These measures not only influenced the confidence in BTC of investors and users in general, but also caused a drop in the hash rate due to the deficit of miners connected to the network. All of this caused the price to plummet due to reduced demand and increased supply. That is, in the face of uncertainty, there were more people selling BTC than buying.
Government measures can also boost the price of BTC caused by increased demand. An example of this was the adoption of bitcoin as legal currency in El Salvador. The more governments recognize the potential behind the cryptocurrency, the better its reputation, and therefore its price rises.
Reputation and usefulness
Why has the price of bitcoin varied so much over time? One reason is that its popularity has increased, so more and more people manage to see the potential behind this cryptocurrency that has revolutionized the current financial system. This contributes to an increase in demand and a reduction in supply, which translates into a price increase.
The reduction in supply, or the amount of BTC available to buy, is due to more and more people and entities deciding to hold onto bitcoins, a term known as hodl. Conserving cryptocurrency has become one of the most common long-term investment forms among bitcoiners, as its value has been understood.
In 2010, the value of a BTC did not even reach a dollar, since the majority still did not perceive the usefulness of the currency and doubted its security, acceptance and efficiency. Today the panorama is very different. With the price of bitcoin topping $ 64,000 at the time of writing, more and more people are making use of this digital asset every day.
In 2011, with the arrival of Silk Road, the first website to accept bitcoin, the popularity of cryptocurrencies soared, and with it their price. However, in 2013 the company was intervened by the FBI due to illegal activities that were carried out on the website, such as the sale of drugs. Again, this event had an impact on the price of bitcoin, but this time in a negative way, due to the fact that the currency began to be associated with illicit activities and demand was reduced.
Opinion of influential figures
The opinion of big businessmen and influential figures in the ecosystem is also a factor that influences supply and demand, and by extension, price. A clear example of this is Elon Musk, CEO of Tesla. In March of this year, Musk announced that his company Tesla would accept bitcoin as a means of payment. As a result, the price went from $ 46,000 at the end of February to a new high of $ 61,000 on March 13, according to data from CoinMarketCap.
Interestingly, a few months later, on May 12, Musk decided that his company would no longer accept bitcoin, claiming that mining is bad for the environment. On the same day, the price of BTC fell dramatically from $ 57,000 to $ 49,000. This is just one case that shows the power that some have over the cryptocurrency market, and it is related to the previous point, the reputation and trust of people in bitcoin.
There are events that are not directly related to BTC, but that still affect its supply and demand. That is what happened in March 2020, when the COVID-19 pandemic was declared. This event had a strong negative impact on the global economy, and bitcoin was no exception.
On March 15, the coin was only worth $ 5,000, according to data from CoinMarketCap. And it is that, in times of crisis, people tend to seek refuge in fiat currencies, leaving aside what they do not consider as an asset that provides them with immediate liquidity. Therefore, the demand was reduced and the supply grew.
Why does the price of bitcoin keep rising?
As we explained above, this is related to the perception of utility of bitcoin. Every day more and more people realize how important this cryptocurrency is and how it has revolutionized the financial system as it is a decentralized asset that many can access from anywhere in the world.
The more people want to get bitcoin, the lower the supply and demand grows, which is reflected in a price increase. Recognized figures in the ecosystem such as Willy Woo and other analysts, predict that soon BTC will enter a bullish stage that will cause its price to rise exponentially at the end of the year 2021.
So who controls the price of bitcoin?
The short answer: the market itself. Through supply and demand, the price of bitcoin is determined. The higher your demand and the lower your supply, the higher the perceived value. Now, other factors also play a role, such as government action, external events, reputation and perceived usefulness, trust, and the opinion of influential figures in the ecosystem.
Thus, being a decentralized currency, bitcoin is not controlled by government entities, so it is people who, in a certain way, decide its value based on multiple aspects. This is perceived on exchanges, where the value of an asset depends on the price you are willing to pay the buyer and the one who is willing to accept the seller.