What determines the price of Bitcoin?
by James · March 13, 2023
In short
- Bitcoin prices are driven by the same principles of supply and demand that govern the cost of goods and services, exchange rates, etc.
- Price discovery is now determined primarily on centralized crypto exchanges (CEX).
The Bitcoin blockchain went live on January 3, 2009. At its inception, the Bitcoin network began issuing its own eponymous currency or money. Every ten minutes the network gave out 50 BTC to a small community of crypto enthusiasts. Although it started from humble beginnings, creator Satoshi Nakamoto had an ambitious goal for Bitcoin to be a “peer-to-peer version of electronic cash” for the world.
Initially, Bitcoin did not have a set monetary value because there was no marketplace for BTC. Without goods and services being offered for Bitcoin, it was difficult – if not impossible – to determine the price in a fiat currency like the US dollar (USD).
Market forces determine prices
Commodity costs, fiat exchange rates (such as USD to EUR) and the spot price of commodities (such as corn and oil) are determined by the laws of supply and demand. When in-demand supplies are created in excess, prices usually go down as demand remains constant. Likewise, a lack of supply tends to cause prices to rise (assuming demand remains constant). This dynamic also applies to BTC and other cryptocurrencies.
Bitcoin Price Markets: Then and Now
On May 22, 2010, 10,000 BTC were exchanged for two pizzas in what is widely considered the first BTC purchase (at the time, one BTC was worth $0.004). Subsequently, others began accepting goods and services in exchange for Bitcoin, which created a market large enough for robust price discovery – which is simply the free market method of determining the price of an asset. Since then, people have bought everything from luxury goods to real estate with BTC.
Since 2010, the price has risen dramatically as demand has typically exceeded supply. From July 2020 onwards, the Bitcoin price has remained above $10,000 and reached an all-time high of $69,990.90 in November 2021. Avoiding BTC-to-pizza markets, price discovery is now determined primarily on centralized crypto exchanges (CEX- er) where BTC is traded for fiat (USD, EUR, KRW) and a number of other cryptocurrencies such as ether (ETH) and litecoin (LTC).
Why is BTC in demand?
Simply put, many who buy and use BTC see it as a fiat currency and payment system alternative. With its limited supply and decentralized nature, some buy it as an inflation hedge, store of value or as an investment. Others who have lost confidence in the banking system or national currency prefer an asset that is difficult to confiscate and does not require a trusted third party to carry out transactions.
Bitcoin Price Predictions vary widely
From being called a “global reserve currency” to “absolutely worthless”, Bitcoin price predictions range from zero to over $1 million. Ultimately, the opinions of Bitcoin supporters and critics will not determine the price. Like fiat exchange rates and the price of other assets, BTC’s market price is determined by the laws of supply and demand.
