As a decentralized digital currency, Bitcoin is valued primarily on supply and demand on the exchanges where it’s bought and sold. But other variables come into play, driving up the value of Bitcoin to new heights and then driving it down at times, too.
What is the Value of 1 Bitcoin?
The price of Bitcoin has risen dramatically since the technology was created in 2009. While at first, one bitcoin had essentially zero value, it gradually rose to a fraction of a penny. Then, it underwent several boom and bust cycles (or “bubbles”) over the years before arriving at today’s valuation of around $37,000.
In March 2020, some exchanges’ prices of one bitcoin fell as low as $4,000 or less. The price then rose 10x to over $40,000 in less than a year as massive government stimulus programs coincided with growing adoption by corporations and large institutional investors.
In April of 2021, Bitcoin notched yet another record high in US dollars at over $63,500, according to Coindesk data—and by mid-May, it was down to $37,739.
What Affects the Price of Bitcoin?
There’s no easy answer to the question, “How is the price of Bitcoin determined?” Because Bitcoin is decentralized, there isn’t even one single price like there is for commodities like oil or gold. Being a decentralized digital commodity has allowed Bitcoin to find a price determined mainly by the total of buy orders and sell orders across multiple exchanges.
Bitcoin constantly trades on many different exchanges. The price is discovered through buyers and sellers agreeing on prices to settle trades. It can be said that “the market” determines the price of Bitcoin. Indexing services, like those provided by Coindesk, Coinmarketcap, Messari, and others, aggregate data from many sources and approximate an average to create a single value.
Of course, many external factors may influence the price people are willing to pay for Bitcoin. These variables can answer the question, “How is Bitcoin valued?”
1. Sentiment
Generally, general market sentiment can influence any asset’s present and future price. This tends to occur in cycles.
It often happens that as more and more people grow increasingly bullish on something, the price keeps rising until everyone thinks it will never go down again. Then, at some point, things change, and sentiment starts shifting the other way. Once most people think the price will never go up again, that usually indicates that prices have come close to bottoming.
This is why CNN has the “Fear and Greed Index.” The index measures sentiment across financial markets at large using seven broad indicators. These indicators measure stock volatility, call-to-put ratios, and the number of stocks making new highs vs. those making new lows.
With Bitcoin, news of increasing adoption or additional capital entering the asset class tends to drive prices upward. Here are a few headlines contributing to Bitcoin’s price performance in 2020 and 2021. Note that positive Bitcoin news doesn’t always have to do with Bitcoin itself but with the cryptocurrency sector in general:
• “Visa Supports Transaction Settlement With USDC Stablecoin”
• “Paul Tudor Jones reportedly buys bitcoin as an inflation hedge, compares crypto to 70s gold trade.”
• “MicroStrategy buys more than $1 billion worth of bitcoin, adding to massive holdings.”
• “Tesla Buys 1.5bn in Bitcoin, Pushing Price to New High.”
Big names like these (and others) have decided to start investing in bitcoin in the past 12 months, which has helped boost the price. Furthermore, these entities are buying up huge sums of bitcoin with the intent to hold for the long term, further reducing the overall supply and putting a floor underneath prices.
Recommended: How to Use the Fear and Greed Index To Your Advantage
2. Mining
Bitcoin mining also impacts the price of Bitcoin. Miners are powerful computers that process transactions for the network and are the source of newly minted bitcoins.
Because miners create and accumulate new coins, what they tend to do can make a big difference in market prices. Miners must sell some of their Bitcoin to cover electricity and maintenance costs. But what they choose to do with their remaining coin can impact prices.
For example, when miners anticipate the future price of Bitcoin to be higher than it is right now, they could choose to hold most of their coins, reducing the overall supply on exchanges. This would create support for prices.
On the other hand, if miners think the price of Bitcoin will fall or need cash today for some reason, they could sell their coins, increasing the supply and potentially lowering prices.
3. Money Supply
Some may argue that the number one factor affecting the price of Bitcoin is the growth in the money supply. When central banks print more money, the price of Bitcoin tends to rise almost directly to the amount of new currency created.
This is part of the supply-and-demand element in Bitcoin’s price. More and more dollars (or Euros, Yen, Pesos, etc.) wind up chasing an ever-dwindling supply of Bitcoin. The new supply of fiat currency keeps growing while the new supply of Bitcoin gets cut in half every four years (a process known as Bitcoin halving).
4. The Network Effect
Some say Bitcoin’s actual value lies in the Bitcoin network. In other words, how many people are using Bitcoin?
A rough analogy would be social media networks. We tend to measure the value of a social network by its number of users and how active they are on the platform. Facebook and Instagram have over a billion users each, with at least half of them logging in daily, in the case of Instagram. This is the main reason people think these networks have value.
With Bitcoin, the more people who create cryptocurrency wallets, convert fiat currency to Bitcoin, and spend or store those coins, the more valuable Bitcoin could become. And as the price of Bitcoin rises, more people tend to join the network, potentially creating a positive feedback loop.
The Takeaway
No single variable can be pinned down as the main driver of the Bitcoin price. While some factors, like news and sentiment, are universal in the financial world, others, like mining and the network effect, are more unique to cryptocurrency. Regarding what to know before investing in crypto, doing more in-depth research on some of the abovementioned concepts could be an excellent place to start.
Note: ZPEnterprises is not a licensed investor/financial advisor, but we are trying to share awareness of financial topics. Please do further research and work with a licensed financial advisor.
