What determines Bitcoin’s price?

Bitcoin’s value debate: Beyond skepticism

As someone who has been closely following the world of cryptocurrencies for the past few years, I have to say that my initial skepticism about Bitcoin has certainly waned. The factors influencing its price are indeed complex and far-reaching, going beyond simple speculation.

While critics like Warren Buffett argue Bitcoin lacks intrinsic value, its growing role as a regulated asset suggests deeper complexities.

As a crypto enthusiast, I can’t help but recall the words of legendary investor Warren Buffett who likened Bitcoin to “rat poison squared.” He reasoned that since it produces nothing tangible and lacks inherent worth, it might as well be rat poison. However, the allure of digital currency continues to draw me in, as I navigate the ever-evolving landscape of the crypto market.

In contrast to conventional assets like gold or oil, Bitcoin (BTC) doesn’t have a physical shape or practical application outside the digital realm.

The intangible nature of Bitcoin often makes people think that its worth stems entirely from collective acceptance – an agreement among investors who choose to buy and hold it. This perspective frequently sparks doubt, as critics argue that Bitcoin is merely a Ponzi scheme, where the price is linked to persuading new buyers. If faith in Bitcoin wanes, there’s a risk that its value could ultimately plummet.

In reality, Bitcoin’s complexity grows as it evolves into a regulated asset or legal tender. Its value is affected by numerous elements.

What makes Bitcoin valuable (really): Supply and demand

As a crypto investor, I find the fixed supply of Bitcoin what sets it apart from other digital currencies. With only 21 million Bitcoins ever to be mined, and over 19.5 million already in circulation by November 2024, this inherent scarcity is why many compare Bitcoin to gold – a “digital gold”. The increasing demand for it while the supply remains limited follows the principles of economics: higher value results from less supply and greater demand.

As a crypto investor, I always keep an eye on the Bitcoin halvings because they significantly impact supply. The next one is scheduled for April 2024, reducing mining rewards from 6.25 BTC to 3.125 BTC per block. These events happen every four years and restrict the amount of new Bitcoins entering the market. Historically, halvings have led to substantial price surges, like in 2020 when Bitcoin skyrocketed from $9,000 before the halving to over $60,000 within a year.

By 2024, Bitcoin’s price rise wasn’t sudden but rather gradual. It started at approximately $45,000 during the winter and peaked at around $70,000 in May, further rising to $99,486.10 by late November. The market is still feeling the squeeze due to a restricted supply stream, with analysts predicting a delayed surge in prices.

In simpler terms, the need for something, like a Bitcoin ETF, isn’t only theoretical – it’s based on real-world situations. Notable companies such as BlackRock introduced spot Bitcoin exchange-traded funds (ETFs) in 2024, which attracted institutional investments and brought more mainstream acceptance to Bitcoin.

Individual investors, utilizing services such as PayPal and Robinhood, are known to increase their participation in the market during a bull run, particularly when fear of missing out (FOMO) resurfaces amid price surges. At the same time, traders often intensify short-term fluctuations by making speculative wagers, contributing significantly to Bitcoin’s renowned price instability.

The scarcity of Bitcoins, coupled with an increasing desire for it from various sectors like institutions and individual users, as well as periodic halvings, ensures that the balance between supply and demand plays a crucial role in determining Bitcoin’s pricing trends.

Did you know? Unlike conventional financial systems, Bitcoin trading is facilitated through a network of various exchanges and entities, such as decentralized peer-to-peer platforms. This differs from traditional systems that rely on one centralized entity. As a result, no single entity can control withdrawals or halt transactions in the Bitcoin system. This feature makes Bitcoin resistant to panic-driven sell-offs to some degree.

The impacts of market sentiment on Bitcoin’s price dynamics

The cost of Bitcoin frequently mirrors the overall mood of the market. A favorable outlook might propel it upward, while unfavorable news can cause a sharp drop. Unlike traditional markets where valuations are primarily based on fundamentals, Bitcoin’s worth is greatly influenced by perception and emotion.

When significant organizations become involved, there’s often an increase in confidence. For instance, BlackRock submitted a Bitcoin ETF application in June 2023, though approval wasn’t granted until January 2024. Yet, just the news was enough to trigger a price jump, with Bitcoin soaring by more than 20% within a few days. Similarly, when businesses such as PayPal or Square reveal their plans for cryptocurrency integration, it underscores Bitcoin’s credibility, driving up demand and value.

On the other hand, unfavorable opinions or sentiments can also cause significant effects, like when reports surface about regulatory tightening. For instance, China’s 2021 mining prohibition resulted in Bitcoin plummeting by almost 50% in value within a short span of time.

Incidents like hacks and security breaches can erode trust. A prime example is the Mt. Gox hack that occurred in 2014, resulting in the theft of approximately 850,000 Bitcoins. This event caused Bitcoin’s value to dramatically drop and it took several years for its price to rebound.

People’s general opinion significantly magnifies these trends. The fear of missing out (FOMO) frequently triggers buying sprees, while apprehension, uncertainty, and doubt (FUD) instigate panic selling during market declines. Social media platforms, online forums such as Reddit, and posts from influencers contribute to these emotional waves, generating a self-reinforcing loop that can swiftly intensify price fluctuations.

Sure thing! The value of Bitcoin is not solely dependent on market sentiment. Instead, its price fluctuates significantly according to the overall mood of the market at any given time. Yet, other factors also play a role in determining its price.

Bitcoin’s macroeconomic role: Hedge, safe haven and market reflection

The value of Bitcoin tends to follow wider economic movements, serving as both a protective investment and a platform for speculation.

In times of economic turmoil, similar to the prolonged financial struggles experienced by nations such as Turkey and Argentina, Bitcoin’s decentralized structure provides a vital lifeline. For instance, in Argentina where annual inflation peaked at an alarming 193% in October 2024, Bitcoin has emerged as a reliable method for preserving value as the local currency weakened significantly and lost its purchasing power.

In much the same way, geopolitical conflicts have underscored Bitcoin’s function as a refuge for financial assets. For instance, during the Russia-Ukraine dispute, Bitcoin has enabled individuals to move funds internationally, even when faced with sanctions and financial constraints.

Although Bitcoin is often perceived as operating independently, it’s not always the case. Following the 2024 U.S. presidential election, Bitcoin rose in tandem with the S&P 500. This was due to the markets reacting positively to the end of the election cycle and the stability it brought, as well as crypto investors being excited about Donald Trump’s proposed pro-crypto policies.

This synchronized motion demonstrates that the value of Bitcoin may mirror larger economic opinions, moving in unison with wider financial sectors when circumstances coincide. It’s clear that its flexibility to accommodate various economic situations places it at the heart of international financial discussions.

How global regulations shape Bitcoin’s price

Regulation also plays a key role in Bitcoin’s price by shaping investor trust and influencing market behavior. In 2024, regulatory developments have had a significant impact, reflecting different approaches in key regions.

2020 saw a surge of enthusiasm in the cryptocurrency sector following Donald Trump’s reelection as U.S. President. He expressed his intent to make the United States the world leader in crypto, even proposing the establishment of a national Bitcoin reserve. This pro-crypto stance ignited interest among institutional and individual investors, contributing significantly to Bitcoin reaching unprecedented record highs in 2024.

Over the Atlantic, the European Union has adopted a more measured approach. The introduction of the Markets in Crypto-Assets (MiCA) legislation seeks to establish extensive regulations for digital assets, prioritizing consumer safety and financial market stability.

While MiCA’s clarity is a step forward, its strict rules on compliance and reporting have made operating in the EU more challenging for crypto businesses. Several startups have either slowed their expansion or shifted focus to less regulated regions, tempering Bitcoin’s momentum in European markets.

From my perspective as an analyst, I observe that Asia is carving out its unique regulatory course. On one hand, cities such as Hong Kong are adopting welcoming regulations for cryptocurrencies, which suggests a positive stance towards this emerging technology. Conversely, countries like India continue to express caution and ambiguity in their policies regarding cryptocurrencies, indicating ongoing uncertainty in the region.

Over time, regulations could give digital currencies like Bitcoin a feeling of authenticity and legality within the overall financial market, potentially allowing them to be treated as legal tender, similar to what happened in El Salvador in 2021. This bridges the divide between traditional and decentralized finance systems.

Additionally, with central bank digital currencies (CBDCs) becoming more significant, regulations could be instrumental in maintaining price stability by encouraging reliability and uniformity within the market.

Did you know? As of 2024, over 130 countries, representing more than 98% of global GDP, are exploring CBDCs. Among these, 11 countries fully launched CBDCs, while many others are in various stages of development or pilot programs.

Bitcoin’s price surge driven by growing institutional and retail adoption

The value of Bitcoin tends to correlate with the extent of its usage, among both large organizations and individual users. As adoption expands, so does its usefulness and desirability, which in turn boosts its price.

The embrace by institutions has significantly transformed the landscape of Bitcoin. Firms such as MicroStrategy, owning approximately 330,000 Bitcoins as of November 2024, view this cryptocurrency as a protective asset against inflation, using it as a reserve in their holdings.

Another significant factor is the growing utilization of Bitcoin in retail transactions. More and more people are using Bitcoin for everyday purchases and international money transfers. For instance, numerous remittance services across Latin America have adopted Bitcoin to lower costs and speed up transactions. In 2024, PayPal broadened its Bitcoin payment option worldwide, facilitating consumer usage of Bitcoin for transactions, thereby enhancing transaction volume and acceptance.

The growth in technology has not only made Bitcoin more versatile but also facilitated faster and less expensive transactions through a system called the Lightning Network. This layer-2 solution is particularly useful for micropayments and everyday use due to its speed. In 2024, significant players such as Square and Strike continued to incorporate the Lightning Network, enhancing Bitcoin’s scalability and attractiveness. These advancements have lowered barriers for businesses and consumers, thereby promoting wider acceptance.

Embracing adoption across all layers fortifies our network, enhancing its worth and boosting Bitcoin’s prospective long-term market value.

Have you heard? The number of individuals worldwide owning cryptocurrencies reached approximately 560 million in the year 2024, marking a notable rise of 34% compared to the preceding year.

Bitcoin’s price: More than speculation?

The value of Bitcoin can be affected by various elements, including its supply levels, acceptance among users, and broader economic conditions. This suggests that it might not just be a matter of speculation.

The value of Bitcoin may not be as straightforward as Warren Buffett suggests. Contrary to those who view it merely as a speculative bubble, its true nature is influenced by a blend of various elements.

The value of Bitcoin is sustained by a variety of influences, including its scarce nature (limited supply), periodic halvings, widespread acceptance by institutions, and broader economic patterns.

With growing recognition as both a controlled investment option and legal currency in certain instances, the value of Bitcoin is becoming more closely connected to actual market demand, technological advancements, and its significance within a digitally oriented financial ecosystem.

It’s very well more than just speculation!