What determines the Bitcoin price?

How is Bitcoin priced?

Market forces called supply and demand influence Bitcoin’s price. The price typically decreases when there are more sellers or vice versa.

Bitcoin (BTC) is a cryptocurrency that is not issued by any government or legal body, in contrast to fiat currencies, such as the United States dollar, the British pound, the euro and the Japanese yen. To create, store and move BTC, a dispersed network of users and cryptographic protocols are required.

Investors carry out their commercial transactions directly instead of using an intermediary. The peer-to-peer Bitcoin network removes trade restrictions and streamlines commerce. Satoshi Nakamoto proposed the world’s first cryptocurrency in 2008, which was launched in January 2009.

The number of businesses accepting Bitcoin contributes to its usability and perceived value. However, its price has been subject to significant volatility and is influenced by factors such as media coverage, investor sentiment and regulatory news, which have led to rapid price fluctuations. Even at the height of its popularity, finding precise answers to common questions is challenging, such as, what determines Bitcoin’s price? Who sets Bitcoin’s price? And does Bitcoin have intrinsic value?

The same supply and demand market dynamics that affect the price of other goods and services also determine the price of Bitcoin. Prices will probably rise if there are more buyers than sellers or vice-versa. Furthermore, it is important to note that the price of Bitcoin is not determined by a single entity, nor is it traded in a single location, such as on a stock exchange. 

Instead, each market or exchange determines its price based on supply, demand and other factors, such as technological advancements, security measures and regulatory developments.

What factors could impact Bitcoin’s price?

Various factors impacting Bitcoin’s price include the supply and demand of BTC, competition from other cryptocurrencies, news, cost of production and regulation.

Supply and demand

Those with a background in economics know the law of supply and demand, which states that supply and demand market forces work together to determine the market price and the quantity of a specific commodity. For instance, the demand for an economic good declines as the price increases and sellers produce more or vice versa.

The fundamental economic principle of supply and demand plays a crucial role in Bitcoin’s valuation. Bitcoin has a 21 million coin hard cap on its supply, introducing scarcity to the digital currency. Miners will no longer receive new Bitcoin for verifying transactions once that cap is reached. 

Similarly, an event called the Bitcoin halving halves the reward for mining new blocks every four years (approximately), reducing the rate at which new BTC enters the market supply. As supply growth slows, if demand remains steady or increases, it can lead to higher Bitcoin prices. 

Competition and news

Bitcoin competes with numerous alternative cryptocurrencies, such as Ether (ETH) and Dogecoin (DOGE), each with unique features that attract investor interest. Additionally, news and media coverage can significantly impact investor sentiment, driving price fluctuations based on perceptions of Bitcoin’s future prospects.

Cost of production

The cost of producing Bitcoin encompasses not only direct expenses like infrastructure and electricity for miners but also indirect costs related to the complexity of the cryptographic challenges they must solve. These costs contribute to establishing a baseline or “break-even” point for miners, affecting the lowest price at which they might consider it economically viable to mine Bitcoin. 

This break-even point is often referred to as the “floor price” in the context of Bitcoin mining, representing the minimum price at which mining Bitcoin can be profitable when considering operational costs.

Moreover, the Bitcoin network adjusts the difficulty of its cryptographic puzzles in response to the overall mining power, influencing how quickly new Bitcoin are produced. These adjustments can either decelerate or accelerate the rate of Bitcoin creation, affecting the overall supply and, subsequently, its market price.

Regulation

Cryptocurrency regulations are constantly changing, with some countries taking a friendly approach to crypto, such as El Salvador, which made Bitcoin legal tender in 2021, and others taking a less friendly approach to crypto, such as China, which formally banned crypto transactions outright in 2019. Regulatory developments can significantly impact Bitcoin’s market dynamics, creating uncertainty that may affect its price. 

When authorities introduce restrictive measures, it can exert downward pressure on Bitcoin’s price. Conversely, regulatory actions that enhance market accessibility, like approving spot Bitcoin exchange-traded funds (ETFs) in the United States and improving security measures, can foster greater market participation and potentially lead to an increase in Bitcoin’s price.

Why is the Bitcoin price so volatile?

Uncertainty regarding the intrinsic value of Bitcoin and BTC’s future price makes it a highly volatile asset.

The amount of new Bitcoin entering the supply decreases steadily every four years in the halving, decreasing the asset’s inflation rate over time. According to CompaniesMarketcap, Bitcoin is the 10th-largest asset by market cap at the time of writing and is no longer a niche asset but a significant player in the broader financial landscape. Moreover, media coverage can disproportionately affect asset prices, and this phenomenon is not exclusive to Bitcoin. 

However, the immediacy and ubiquity of information today, facilitated by digital media and social media platforms, means that news (positive or negative) can rapidly influence investor sentiment and, consequently, asset prices across the board. This effect is amplified in highly speculative markets where investor sentiment plays a crucial role, as is often the case with cryptocurrencies. 

The approval of U.S.-based spot Bitcoin ETFs on Jan. 11 significantly impacted Bitcoin’s price, attracting institutional capital and increasing demand. As a result, at the time of writing, the price of Bitcoin has surged by 33% since Jan. 11 as traditional finance investors and institutions rallied to invest.

Considering this high volatility, can the Bitcoin price go to zero? Such a scenario is highly unlikely but technically possible under extreme conditions, such as a catastrophic technological failure undermining the blockchain’s security or a complete loss of confidence by all users and investors. However, these scenarios are highly improbable due to Bitcoin’s decentralized nature, widespread adoption, and the robustness of its underlying technology.  

Moreover, layer-2 innovations like the Lightning Network aim to solve usability and scalability problems, which could improve the value proposition of Bitcoin. Unlike Ethereum’s ERC-20 token standard, which facilitates the creation of tokens and smart contracts on its network, Bitcoin, by design, does not natively support complex smart contracts or token standards. 

Nonetheless, innovative solutions are being developed to extend Bitcoin’s capabilities in this area. For instance, developments like the RSK (Rootstock) platform are bridging this gap by introducing smart contract functionality to the Bitcoin ecosystem. 

Additionally, the BRC-20 token standard represents an innovative approach to introducing tokenization capabilities directly on the Bitcoin blockchain. As an experimental standard, BRC-20 aims to enable the creation, minting and transfer of fungible tokens, akin to how the ERC-20 standard functions on Ethereum and other Ethereum Virtual Machine-compatible networks.

How high can Bitcoin realistically go?

The potential future price of Bitcoin is subject to a wide range of predictions and speculation, influenced by various factors that can affect its price trajectory, including determinants such as market adoption, regulatory developments, technological advancements within the blockchain ecosystem and broader economic conditions.

Market adoption is important because demand can be stimulated by greater acceptance of Bitcoin for investments and transactions. Government and financial agencies worldwide can help or hinder Bitcoin’s growth with their regulatory actions, based on whether they impose restrictions or offer users security and clarity. 

Technological advancements may have a beneficial effect on the value of Bitcoin if they increase its scalability, security and use cases. Furthermore, the appeal of Bitcoin as an investment may be impacted by macroeconomic variables, including inflation rates, currency devaluations and investor sentiment toward traditional and digital assets.

Another additional aspect to consider is Bitcoin’s growing reputation as a “digital gold,” ultimately driving it toward becoming a store of value and a safe-haven asset. This comparison not only emphasizes the potential of Bitcoin as a hedge against economic volatility but also illustrates its distinct advantages over conventional investments such as gold, owing to its digital form and finite supply. 

Given these variables, predicting a specific value that Bitcoin could reach is challenging. Significant volatility has been observed in historical trends, with intervals of sharp price gains interspersed by corrections. Using the technology adoption S-curve framework, one can anticipate Bitcoin’s future acceptance and growth trajectory. This model suggests that as Bitcoin evolves and navigates through initial adoption challenges, it will likely gain broader acceptance, mirroring the path other groundbreaking technologies take.

However, as discussed above, the theoretical upper limit of BTC’s price is highly speculative and dependent on further advancements. Potential profits are not guaranteed, just like with any investment; thus, care should be taken while speculating on Bitcoin’s future price swings.