What determines the price of Bitcoin?

Bitcoin logo against graph.

Just like any other asset or good, Bitcoin’s price is determined by supply and demand. But how does that work, and what factors affect the supply and demand for Bitcoin?

What is supply and demand?

Supply and demand is an economic principle that governs the pricing of goods and services such as gold, properties, currencies and cryptocurrencies. When demand for an asset exceeds its supply, prices tend to rise, creating an incentive for suppliers to produce more. Conversely, if supply outstrips demand, prices fall, leading suppliers to scale back production. 

To put it in really basic terms, if I have a chocolate bar and two friends want it, I can have them bid on it and then sell it to the highest bidder. If neither of them want it, I’ll likely have to cut the price until I can make it an enticing-enough proposition for one of them to make it worth their while.

Bitcoin’s fixed supply

Bitcoin has a finite supply of 21 million coins that’s released at a regular, known schedule. This is hard-coded so it cannot be changed. This scarcity inherently influences its value. This can be contrasted against traditional fiat currencies, where supply can be influenced by central banks as and when it’s required. The fact that the supply of Bitcoin is known means that its price is mainly affected by demand. The more people and companies that want to buy Bitcoin, the higher the price, and vice versa.

What impacts supply and demand for Bitcoin?

While supply and demand serve as the driving forces behind Bitcoin’s price, what specific factors influence these dynamics? There are thousands of events that can have an impact, but some of the most influential factors include: 

  • Regulatory developments: Both positive and negative news around regulations and legal developments in major markets can influence demand for Bitcoin.
  • Market liquidity: The liquidity of the Bitcoin market, or how easily it can be bought or sold, also plays a role. Higher liquidity generally means that large transactions can be executed with less impact on the price. 
  • Technological developments: Changes or upgrades to Bitcoin’s protocol and underlying technology can make it more appealing. For example, improvements in security, scalability, or functionality may be viewed positively by the market.
  • Macroeconomic factors: Economic conditions, inflation rates, and the overall economic environment can also impact demand. Some investors view Bitcoin as a store of value or a hedge against inflation, so economic factors may influence their decisions.

Investing in cryptocurrency may result in the loss of capital as the value can fluctuate.

This information should not be construed as a solicitation to trade. All opinions, news, research, analysis, prices or other information is provided as general market commentary for information purposes only and is not investment advice or recommendation. Luno always advises you to obtain independent financial advice before investing or trading in cryptocurrency.

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