What factors drive the price of Bitcoin?

Date: 2019-04-17

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As with anything else in this world, Bitcoin’s (and other cryptocurrencies’) price is driven by supply and demand.

In practice, Bitcoin is “produced” by the miners, which in essence “mine” the bitcoin through a computer program. The difficulty of the mining process will increase with the number of Bitcoins being mined, which will require a higher amount of energy and higher computer specs.

So, this is how the supply of bitcoin is “regulated”, and when the demand from the bitcoin buyers increases above the number of supply, the price will rise, and vice versa.

Other factors can indirectly affect the supply and demand reactions. For example, when a government regulation ban bitcoin payment in a certain country, the demand from that country will decrease, which might lower the price.

Media influence can also affect buying desires, which can affect price indirectly, as with technological changes of the bitcoin’s blockchain system, among other external factors.

So, in the end it will boil down to supply and demand: supply regulated by the mining difficulty, and demand regulated by many outside factors.

On the other hand, a lot of it has to do with how much major players want to game the system and artificially inflate (or prop up) the price.

You look at something like Tether, which is pegged to the US dollar and largely owned by the folks at Bitfinex. When Bitcoin starts tumbling, Tether always gets a miraculous influx of cash so they release a bunch of Tethers to exchange for Bitcoin, which in turn props up its price. And then you just pull a bunch of Tethers out of circulation to stabilize Tether's price at $1.00 and voila: everything is hunky dory.

Another way folks are gaming the system is to produce artificial activity. A lot of trading algorithms look at volume to determine the health of the market, so what's a good way to boost volume? Just sell humongous amounts of Bitcoin to yourself. You'll see it happen all the time. Someone offers to sell something ridiculous, like $20,000,000 worth of Bitcoin and they miraculously find a buyer within minutes. (This is also another wonderful way to artificially set the price.)

You might wonder how this could happen and the answer is that there are zero regulations, which is how bubbles like Bitcoin flourish. Zero regulations, mass misunderstanding of both the technology itself and its usefulness (which, there is basically zero usefulness), and a ton of available capital looking for something to invest in (with interest rates still insanely low, nobody is saving money) - you've got the recipe for the massive Bitcoin bubble we're seeing.

(And, yes, it's still a bubble. I wouldn't be shocked if Bitcoin fell below $1,000 by the end of the year. Heck, I wouldn't be surprised if all cryptocurrency was functionally valueless in the near future, because
functionally they're all basically valueless.)