How Is Bitcoin’s Price Determined?
Bitcoin's price changes because of its supply, the market's demand, media and news, and regulatory changes. Some research suggests that the cost of producing a bitcoin also influences its prices, but most reports used assumed data rather than facts.
Bitcoin is not issued by a central bank orbacked by a government; therefore, the monetary policy tools, inflation rates, and economic growth measurements that typically influence the value of a currency do not apply to Bitcoin.
Key Takeaways
- Purchasing stock grants you ownership in a company, whereas buying bitcoin grants you ownership of however much cryptocurrency your money bought.
- Bitcoin is neither issued nor regulated by a central government and, therefore, is not subject to governmental monetary policies.
- Bitcoin’s price is primarily affected by its supply, the market’s demand, availability, competing cryptocurrencies, and investor sentiment.
- Bitcoin supply is limited—there is a finite number of bitcoins, and the final coins are projected to be mined in 2140.
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Effects of Supplyon Bitcoin's Price
The supply of an asset plays a vital role in determining its price. A scarce asset is likelier to have high prices, whereas one available in plenty will have low prices. Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be rewarded at a fixed rate, and that rate is designed to slow down over time.
The Bitcoin block reward is reduced about every four years. This is called a halving, where the number of coins given as a reward for successfully mining a block is cut in half. The last halving was on April 19, 2024, which brought the block reward to 3.125 bitcoin.
Therefore, Bitcoin's future supply is dwindling, which adds to demand. This is similar to a reduction in corn supply if harvests were to be reduced every four years until no more was harvested, and it was publicly advertised that it would happen—corn prices would skyrocket.
Bitcoin's Price and Demand
Bitcoin has attracted the attention of retail and institutional investors, increasing demand fueled by increased media coverage, investing "experts," and business owners touting the value a bitcoin has and will have.Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular with those who use it to transfer large sums of money for illicit and illegal activities.
This means that shrinkage in future supply has coupled with a surge in demand to fuel a rise in price. However, bitcoin's price still fluctuates in alternating periods of booms and busts. For example, a run-up in bitcoin's prices in 2017 was succeeded by a prolonged low, then two sharp increases and downticks through 2021. In 2024, its price soared to more than $75,000 on one exchange after the Securities and Exchange Commission approved several Bitcoin Spot ETFs, a result of an increase in demand.
Competition and Bitcoin's Price
Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for investment dollars. As of 2024, bitcoin dominates trading in cryptocurrency markets. But its dominance has waned over time. In 2017, it accounted for more than 80% of the overall market capitalization in cryptocurrency markets. By 2024, that share was down to less than 55%.
The main reason for this was increased awareness of and capabilities for alternative coins. For example, Ethereum has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) applications. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether (ETH), the cryptocurrency used as “gas” for transactions on its network. Ethereum accounts for about 15% of the overall market cap of cryptocurrency markets.
New cryptocurrencies are introduced daily. CoinMarketCap maintains a list of recently added coins.
Other cryptocurrencies continue to be introduced, resulting in a continuous search for the next one that will rival Bitcoin. Tether, BNB, USDCoin, and Solana are a few other coins that are taking market capacity away from Bitcoin. As a standard-bearer of sorts for the cryptocurrency ecosystem, Bitcoin has benefited from the attention, and its prices have remained high.
Bitcoin's Price and Regulations
Bitcoin was released in the aftermath of a financial crisis precipitated by the loosening of regulations in the derivatives market. The cryptocurrency itself remains unregulated and has garnered a reputation for its cross-border capabilities and regulation-free ecosystem.
Bitcoin’s lack of regulatory status has both benefits and drawbacks. The absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies. However, its price is very responsive to regulatory developments.
Investors also influence prices when they become too excited about an asset, causing it to be overvalued. They can also cause it to drop when they panic about possible losses. Investors need an accurate way to track and monitor coin values.
For example, in the United States, cryptocurrency rulings delivered by the Securities and Exchange Commission (SEC) can impact its price. In October 2021, prices surged to $69,000 a few weeks after the SEC approved the first U.S. bitcoin-linked ETF: the ProShares Bitcoin Strategy ETF (BITO). However, a few months after reaching that price, bitcoin's price hovered around $40,000.
China's bitcoin trading and transaction ban in September 2021 affected the cryptocurrency's supply and demand. Mining farms in China were forced to pack up and move to cryptocurrency-friendly countries. Prices fell from around $51,000 at the beginning of September to about $41,000 at the end of the month, then quickly regained and surpassed previous price levels as operations picked back up.
Social media postings from well-known people or celebrities can affect how investors feel about Bitcoin, which affects its price.
Bitcoin's Price and the Media
In an attempt to keep investors and interested parties informed, the media and news coverage work both for and against Bitcoin's price. Changes in any of the factors previously discussed are quickly published and disseminated to the masses. As a result, good news for cryptocurrency investors tends to send its price up, while bad news sends it down.
Are Bitcoins a Good Investment?
Bitcoin has been very volatile in its short time as an investment asset. It's best to speak to a finance and investment professional about your specific situation before investing in Bitcoin.
What Is Bitcoin's Current Stock Price?
There isn't a Bitcoin stock, but you can purchase shares of companies that invest in blockchain technology or cryptocurrency.
Are Bitcoins Illegal?
Bitcoins are recognized as a form of currency in many countries, but only one considers them legal tender. Outright bans exist in China, Algeria, Bangladesh, Saudi Arabia, Morocco, Nepal, Pakistan, Bolivia, and Tunisia.
Is It Worth Buying $100 of Bitcoin?
Bitcoin's price is volatile, so the $100 you spend on portions of a bitcoin today may not be worth $100 tomorrow or even in the next 30 minutes. However, your bitcoin may be worth more. If you're buying it as an investment, you should consult a finance and investment professional about your specific financial circ*mstances.
The Bottom Line
The combination of supply, demand, production costs, competition, regulatory developments, and the media coverage that follows influences investor outlook, which is one of the most significant factors affecting cryptocurrency prices.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own bitcoin.
