Bitcoin (BTC) is the world's most famous and most important cryptocurrency. Many have heard of it, but very few actually know how its price is determined. As such, this article aims to help you better understand how Bitcoin's price is established.
What is Bitcoin? A brief overview
Bitcoin is a decentralized digital cryptocurrency based on the decentralized blockchain system. The concept was first developed in 2008, but the Bitcoin blockchain only became operational on January 3, 2009.
It was created as an alternative to the traditional banking system. Indeed, one of the arguments put forward by Bitcoin's supporters is that there is no need for an external authority (such as a financial institution) to control, manufacture and issue the cryptocurrency. Another benefit is that it can be exchanged anonymously and freely via platforms or ATMs.
How is Bitcoin's (BTC) exchange rate determined?
A cryptocurrency's stock price is highly volatile, as it is determined by supply and demand: it can go up and down extremely fast. There is a lot of speculation. The cryptocurrency market is therefore subject to instability, and prices fluctuate constantly.
As explained above, the value of a cryptocurrency (like all goods and services) is determined by supply and demand. If demand for a cryptocurrency exceeds supply, the price rises. Conversely, if demand is lower than supply, the price drops.
In Bitcoin's (BTC) case, supply is limited to 21 million bitcoins over time. As quantities are limited, it can be assumed that there is (or could be) a scarcity. This scarcity may lead to an increase in price as time goes by. Moreover, Bitcoins are mined by users with mining capabilities: they are the originators of the currency. Moreover, Bitcoins are mined by users with mining capabilities: they are the ones issuing the cryptocurrency.
What else can affect Bitcoin's value besides supply and demand?
Besides supply and demand, several factors can affect Bitcoin's (BTC) value.
Government regulation
Government regulation can be as much a drag as a driver for cryptocurrencies.
More flexible and crypto-friendly regulations lead to increased demand and, consequently, lead to higher prices. Many countries consider cryptocurrencies legal. In some countries, cryptocurrencies are neither legal nor illegal. Economic agents can own and use them, but there is no regulation or legal framework. El Salvador is a case in point: it is the first country to adopt Bitcoin as an official currency in 2021.
On the other hand, stricter (even hostile) regulations on cryptocurrencies act as a brake, hindering their exploitation and use by economic agents. China, India and Egypt, among others, have introduced restrictions on Bitcoin. Others have banned Bitcoin, making it illegal: Bolivia, Algeria, Vietnam… Despite restrictions and bans, due to its decentralized nature (like all other cryptocurrencies), Bitcoin can still be used in many of these countries.
Economic situation
During troubled times, economic agents, wary of traditional markets and institutions, are more inclined to seek out alternative markets and institutions. These troubled times prompt them to rely more heavily on reliable cryptocurrencies such as Bitcoin, granting them a safe-haven status (gold being the prime example).
Halving
Halving involves reducing by half the reward given to users in exchange for newly mined Bitcoins. This maintains the scarcity of the cryptocurrency. This scarcity stimulates a decline in supply, causing demand to exceed supply: the price increases. In the case of Bitcoin, this phenomenon occurs every four years, or after 210,000 blocks have been mined.
Several other factors influence Bitcoin's value, beyond those mentioned above. Among them, whales (which hold large quantities of Bitcoins), competition with other cryptocurrencies…
Conclusion
In summary, Bitcoin's price is determined by supply and demand. It is a highly volatile cryptocurrency, as it doesn't depend on any institution and engenders a lot of speculation. As a result, prices fluctuate constantly and instabilities are legion. Bitcoin is also vulnerable to external events that influence its price.
To find out the value of Bitcoin, there are several tools available providing real-time exchange rate information (Binance, Coinbase, etc.).
