What Determines the Price of Bitcoin?

Bitcoin can be an extremely volatile investment, often fluctuating double-digit percentage points each week. Even though Bitcoin –– and other digital assets for that matter –– are extremely volatile, cryptocurrencies have outperformed almost any other asset class. Just over a decade ago, Bitcoin traded for less than $1. In 2021, Bitcoin surpassed $65,000 and investors are bullish on the asset class heading into 2023.

But what actually determines the price of Bitcoin, and does it have real value?

Determining Factors of Bitcoin’s Price

Like gold and silver, Bitcoin is a commodity. A commodity is a basic good that is interchangeable with goods of the same type. 

Some commodities, like agricultural products, have value because they are used as inputs for other goods or can be consumed by customers.

Other commodities, like gold and silver, have value because they are scarce and people give them value. Bitcoin’s value is derived in a similar way as precious metals: Its value is based on scarcity and high demand.

And unlike a publicly-traded company, Bitcoin is not governed by a central entity. It also doesn’t have a balance sheet, profits or even revenues, which are commonly used to determine a stock’s price. Since Bitcoin doesn’t operate like a company, the price is widely determined by market demand for the asset, leading it to be more volatile than stocks and other traditional investments.

Supply and demand determine the price of Bitcoin. Its supply is regulated by algorithms on it’s blockchain — about 6.25 bitcoin are minted every 10 minutes. As of now, there are about 19 million Bitcoin in circulation, and the maximum supply of Bitcoin is capped at 21 million.

Market Supply 

The market supply of Bitcoin is determined by how much Bitcoin is for sale on the market. Sellers can choose the price they want to sell Bitcoin at, so the number of buyers has to be greater than the number of sellers at any given price for Bitcoin’s price to increase. 

Although 19 million bitcoins are in circulation, many of these coins have been lost to the point where they can’t be recovered. According to the cryptocurrency data firm Chainalysis, about 20% of all bitcoins (around 3.7 million) have been lost. This number is determined by bitcoin that is stored in a cryptocurrency wallet that hasn’t had any interaction in the last 5 years.

Market Demand 

The market demand is determined by how many buyers there are for Bitcoin at any given time. As buyers purchase Bitcoin, they drive the price of the commodity up. Once sell orders at a certain price are bought up, the price increases to the next lowest sell order price. 

There are many factors that drive up Bitcoin’s demand. Here’s a list of some of the most important factors that affect Bitcoin’s demand:

  • Inflation of fiat currency. If a country’s currency is suffering from inflation, more people demand Bitcoin. This is because Bitcoin is much less likely to depreciate in value less than a currency suffering from inflation, especially if the country is suffering from hyperinflation.
  • The media. The media plays a large role in stimulating market demand for Bitcoin. As Bitcoin’s price rises, more media outlets give the commodity coverage and market demand for Bitcoin rises.
  • Regulation. Government regulation can impact market demand either positively or negatively. Regulation makes cryptocurrencies more safe and accessible. However, these regulations may deter some investors from buying Bitcoin in the short-term due to increased taxes and more transparent consumer identification.
  • Politics. Bitcoin’s price often rises when the government becomes more unstable. Because the U.S. government controls the dollar, less people trust fiat currency when the government is unstable, resulting in an increase in demand for Bitcoin.

Bitcoin Miners

Bitcoin miners affect the market supply of Bitcoin in a unique way. Miners secure Bitcoin’s network with computational power, and they are paid in transaction fees and block rewards. 

The block reward is the amount of Bitcoin rewarded for completing a block on the blockchain, which is currently 6.25 Bitcoin per block. These rewards are newly minted bitcoins, and the reward halves every 4 years during what’s called the Bitcoin halvening. Bitcoin is set to halve its block reward next in 2024. 

Bitcoin miners can hold their bitcoin, but many large operations sell their bitcoin to the market once they receive block rewards. Miners sell their bitcoin to lock in profits to avoid Bitcoin’s volatility. Because Bitcoin’s price is determined by supply and demand, selling these newly minted bitcoins to the market drives the price of Bitcoin down.

Electricity Costs

The cost of electricity affects Bitcoin’s price because miners use large amounts of electricity to mine Bitcoin. If the price of electricity is low, then miners can profit more from Bitcoin, meaning that they are more likely to sell their bitcoin for profit if they pay less for electricity. Conversely, if the price of electricity exceeds the price at which miners can sell bitcoin for a profit, they’re better off not mining at all. 

Competition From Other Cryptocurrencies

Cryptocurrency exchanges commonly have altcoin-Bitcoin pairs. Altcoins are any cryptocurrency other than Bitcoin. 

Because exchanges allow you to trade against Bitcoin, people often directly buy other cryptocurrencies using Bitcoin. To do this, they sell their Bitcoin, driving up supply and lowering the price.

Current Bitcoin Price

While Bitcoin had a phenomenal run in 2021, bearish macro economic conditions have put downwards pressure on Bitcoin’s price for the first half of 2022. Heading into the second half of 2022, many investors are still bullish on both Bitcoin and the asset class as a whole. Take a look at the most up-to-date Bitcoin price.

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Who Changes the Price of Bitcoin

No one person can change the price of Bitcoin significantly –– except maybe Elon Musk and Michael Saylor. The aggregate amount of buy and sell orders from all the crypto investors in the market is what changes the price of Bitcoin. But some players in the crypto space have more impact on Bitcoin’s price than others. 

Whales –– people who own huge amounts of bitcoin –– can push prices up and down if they place extremely large buy or sell orders. Data from Bitinfo affirms that very few crypto wallets hold most of the Bitcoin in existence: 99.5% of Bitcoin wallets hold a balance of less than 1 bitcoin. Some people claim that whales manipulate the price of Bitcoin, but this is hard to confirm. 

Satoshi Nakamoto, the anonymous creator of Bitcoin, owns 1 million bitcoin, and could potentially change the price of Bitcoin if it is ever sold. But this is an extremely unlikely scenario, as Satoshi would expose his identity if he ever sold his bitcoin.

Bitcoin Crashes

Since it doesn’t have balance sheets, profits or revenues, it’s hard to give Bitcoin intrinsic value. Bitcoin’s price is mostly speculative and highly volatile. It’s not uncommon for Bitcoin’s price to drop 80% to 90% in bear markets before returning back past it’s all-time highs. There are also short-term price crashes during bull markets, but these usually don’t surpass a 40% dip and typically recover shortly thereafter.

Best Bitcoin Exchanges

An investment in Bitcoin can be an exciting way to diversify your portfolio. To invest in Bitcoin, you need to sign up for an account with a cryptocurrency brokerage. There are many great options for crypto brokerages, such as Gemini, Coinbase eToro and Kraken.

Take a look at our top picks for Bitcoin exchanges.

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Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.

Webull is widely considered one of the best Robinhood alternatives.

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Gemini is a cryptocurrency exchange and custodian that offers investors access to over 100 coins and tokens. Founded in the US, Gemini is expanding globally, in particular into Europe and Asia. Offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.

Gemini is 1 of the only brokers with multiple platform options based on skill level. New investors will love the streamlined interface of Gemini’s mobile and web apps, while advanced investors might appreciate all the tools that come with ActiveTrader. 

In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.

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Pionex is a cryptocurrency exchange with built-in trading bots. You can access 12 unique trading bots for no additional fee. These bots allow you to automate your investing strategy so you don’t need to constantly monitor the market. Pionex features low trading commissions and a fully fleshed-out mobile app. We believe Pionex would be a great option for high-volume and mobile investors.

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Robinhood is the broker for traders who want a simple, easy-to-understand layout without all the bells and whistles other brokers offer. Though its trading options and account types are limited, even an absolute beginner can quickly master Robinhood’s intuitive and streamlined platform. On the other hand, more advanced traders might be frustrated by Robinhood’s lack of technical analysis tools, a feature that’s now nearly universal across other platforms.

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Frequently Asked Questions

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Q: Why do bitcoins have value?

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Q: Why do bitcoins have value?
asked
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A: Bitcoin has value because people give it value. It is scarce, and there is only a finite amount, similar to gold and silver. Using Bitcoin as a store of value has many advantages over precious metals.

Bitcoin is much easier to store, transfer and own than gold. Precious metals that are used as stores of value also need to be stored in a physical location, making the cost of storing large amounts of gold much higher than the cost to store Bitcoin.

And there technically isn’t a finite amount of gold and silver. These precious metals are constantly being mined, adding to the supply. Companies are trying to find ways to mine precious metals from asteroids which could greatly increase the supply of gold.

With Bitcoin, there will never be more than 21,000,000 in supply. For these reasons, many investors see Bitcoin replacing gold as a universal store of value in the future.

answered
Q

Q: How are bitcoins created?

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Q: How are bitcoins created?
asked
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A: Bitcoins are created through a process called mining. Bitcoin miners power Bitcoin’s blockchain with computational power for block rewards and transaction fees.

The block reward is currently 6.25 bitcoin per block which is split proportionally based on the computational power the miners provide. A block is completed every 10 minutes, so 6.25 bitcoin are minted every 10 minutes

The block reward for mining halves every 4 years in an event called Bitcoin halving. This will happen again in 2024, reducing block rewards to 3.125 bitcoin every 10 minutes. This will continue for about 120 years until 2140 when all the bitcoins have been mined. Once this occurs, miners will profit solely from Bitcoin transaction fees.

answered

Why is Bitcoin Valuable?

Bitcoin has value because people value it. The U.S dollar, gold and silver are similar –– they aren’t backed by anything except people’s trust that these assets will hold, and hopefully increase, in value. 

Bitcoin can be considered the superior store of value in many ways. Bitcoin doesn’t take up physical space, so it’s easier and cheaper to store than precious metals or fiat currency. And Bitcoin can be sent around the world securely, without the risk of being stolen. 

Bitcoin is also the 1st commodity to truly have a finite amount in circulation. While precious metals are scarce, more can be mined. With a limited supply that will increase demand, it’s not unreasonable to predict that Bitcoin could replace gold as the universal store of value in the future.

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