Ever wondered what are the factors which led bitcoin price to such heights? How bitcoin
price is determined? Well, we have got answers of all the queries regarding bitcoin’s
price.
Bitcoin price is measured against fiat currency, such as American Dollars (BTCUSD),
Chinese Yuan (BTCCNY) or Euro (BTCEUR). Bitcoin therefore appears superficially
similar to any symbol traded on foreign exchange market
Unlike fiat currencies however, there is no official Bitcoin price; only various averages
based on price feeds from global exchanges. Bitcoin Average and CoinDesk are two
such indices reporting the average price. It’s normal for Bitcoin to trade on any single
exchange at a price slightly different to the average.
But discrepancies aside, what factors determine Bitcoin price?
Supply and Demand
The general answer to “why this price?” is “supply and demand.” Price discovery
occurs at the meeting point between demand from buyers and supply of sellers.
Adapting this model to Bitcoin, it’s clear that the majority of supply is controlled by early
adopters and miners.
Supply
Inspired by the rarity of gold, Bitcoin was designed to have a fixed supply of 21 million
coins, over half of which have already been produced.
Several early adopters were wise or fortunate enough to earn, buy or mine vast
quantities of Bitcoin before it held significant value. The most famous of these is Bitcoin’
s creator, Satoshi Nakomoto. Satoshi is thought to hold one million bitcoins or roughly 4.
75% of the total supply (of 21 million). If Satoshi were to dump these coins on the
market, the ensuing supply glut would collapse the price. The same holds true for any
major holder. However, any rational individual seeking to maximise their returns would
distribute their sales over time, so as to minimize price impact.
Miners currently produce around 3,600 bitcoins per day, some portion of which they sello cover electricity and other business expenses. The daily power cost of all mining is
estimated around $500,000. Dividing that total by the current btc to usd price provides
an approximation of the minimum number of bitcoins which miners supply to markets
daily.
Demand
With the current mining reward of 25 BTC per block solution, Bitcoin supply is inflating
at around 6.25% annually. This rate will drop sharply in 2016, when the next reward
halving occurs. That Bitcoin price is rising despite such high inflation (and that it rose in
the past when the reward was 50 BTC!) indicates extremely strong demand. Every day,
buyers absorb the thousands of coins offered by miners and other sellers.
A common way to gauge demand from new entrants to the market is to monitor Google
trends data (from 2011 to the present) for the search term “Bitcoin.” Such a reflection of
public interest tends to correlate strongly with price. High levels of public interest may
exaggerate price action; media reports of rising Bitcoin price draw in greedy, uninformed
speculators, creating a feedback loop. This typically leads to a bubble shortly followed
by a crash. Bitcoin price has experienced at least two such cycles and will likely
experience more in future.
Drivers of Interest
Beyond the specialists initially drawn to Bitcoin as a solution to technical, economic and
political problems, interest among the general public has historically been stimulated by
banking blockades and fiat currency crises.
Banking Blockades
Probably the first such instance was the late 2010 WikiLeaks banking blockade,
whereby VISA, MasterCard, Western Union and PayPal ceased processing donations to
WikiLeaks. Following a request from Satoshi, Julian Assange refrained from accepting
Bitcoin until mid-way through 2011. Nevertheless, this event shone a light on Bitcoin’s
unique value as censorship resistant electronic money.
The most recent such blockade occurred when MasterCard and VISA blacklisted
Backpage.com , a Craigslist-style site which lists, inter alia, adult services. Adult service
providers whose livelihood depends on such advertising have no way to pay for it
besides Bitcoin.
On the subject of business which banks won’t (openly) touch, there’s no avoiding
mention of darknet drug markets. While the most (in)famous venue, Silk Road, was taken down, the trade of contraband for bitcoins continues unabated on the darknet.
Although only 5% of British users have admitted to purchasing narcotics with Bitcoin,
that figure is likely understated for reasons of legal risk. Finally, the media controversy
over darknet markets has likely brought Bitcoin to the attention of many who otherwise
wouldn’t have encountered it.
Fiat Currency Crises
bitcoin price hype cycle itsblockchain
As discussed our guide, Bitcoin for Bail-in Protection, a Bitcoin wallet can be a lot safer
than a bank account. Cypriots learnt this the hard way when their savings were
confiscatedin early 2013. This event was reported as causing a price surge, as savers
rethought the relative risks of banks versus Bitcoin.
The next domino to fall was Greece, where strict capital controls were imposed in 2015.
Greeks were subjected to a daily withdrawal limit of €60. Bitcoin again demonstrated its
value as money without central control.
Soon after the Greek crisis, China began to devalue the Yuan. As reported at the time,
Chinese savers turned to Bitcoin to protect their accumulated wealth.
china greece bitcoin price
2015 Bitcoin chart by Tyler Durden of Zero Hedge.
A current positive influencer of Bitcoin price, or at least perception, is the Argentinian
situation. Argentina’s newly-elected President, Mauricio Macri, has pledged to end
capital controls. This would eliminate the wide disparity between the official and
black-market peso/USD exchange rates. Argentinians who can purchase bitcoin using
black-market dollars will likely avoid considerable financial pain.
bloomberg
Market Manipulation
No discussion of Bitcoin price would be complete without a mention of the role market
manipulation plays in adding to price volatility. Bitcoin’s all-time high above $1000 was
partly driven by an automated trading algorithms, or “bots,” running on the Mt. Gox
exchange. All evidence suggests that these bots were operating fraudulently under the
direction of exchange operator, Mark Karpeles, bidding up the price with phantom funds.
Mt. Gox was the major Bitcoin exchange at the time and the undisputed market leader.
Nowadays there are many large exchanges, so a single exchange going bad would not
have such an outsize effect on price.
Major Downside Risks
It bears repeating that Bitcoin is an experimental project and as such, a highly risky
asset. There are many negative influencers of price, chief among them being the
legislative risk of a major government banning or strictly regulating Bitcoin businesses.
The risk of the Bitcoin network forking along different development paths is also
something which could undermine the bitcoin price. Finally, the emergence of a credible
competitor, perhaps with the backing of major (central) banks, could see Bitcoin lose
market share in future.
Price Oddities
Sometimes an exchange’s price may be entirely different from the consensus price, as
occurred for a sustained period on Mt. Gox prior to its failure and recently on the
Winkelvoss’ Gemini exchange.
In mid-Novermber 2015, btc to usd hit $2200 on Gemini while trading around $330 on
other exchanges. The trades were later reversed. Such events occur occasionally
across exchanges, either due to human or software error.
Bitcoin is ultimately worth what people will buy and sell it for. This is often as much a
matter of human psychology as economic calculation. Don’t allow your emotions to
dictate your actions in the market; this is best achieved by determining a strategy and
sticking to it.
If your aim is to accumulate Bitcoin, a good method is to set aside a fixed, affordable
sum every month to buy bitcoin, no matter the price. Over time, this strategy (known as
Dollar-cost averaging), will allow you to accumulate bitcoin at a decent average price
without the stress of trying to predict the sometimes wild gyrations of Bitcoin price.
Hi! I am a robot. I just upvoted you! I found similar content that readers might be interested in:
https://www.buybitcoinworldwide.com/price/
Congratulations @emaxxx! You have received a personal award!
Click on the badge to view your Board of Honor.
Congratulations @emaxxx! You received a personal award!
You can view your badges on your Steem Board and compare to others on the Steem Ranking
Vote for @Steemitboard as a witness to get one more award and increased upvotes!