The price of Bitcoin is the monetary cost of a bitcoin. The term “price”, as used here, should not be confused with “value”, which is a perceived consideration of the benefits and usefulness of Bitcoin. The price of Bitcoin is expressed as an exchange rate in relation to another currency. So, for example, the exchange rate of Bitcoin to Dollar can be $ 1,750 for a bitcoin, expressed in $ 1,750 BTC / USD.
By design, a total of 21 million Bitcoins will be created over 100 years according to a logarithmic release function. At the time of writing, a little more than 13 million bitcoins are in circulation, which means that another 8 million bitcoins will be extracted in the next 95 years. Given this period of time and the rate of deceleration of the increase in the currency base, it can be assumed that the supply of bitcoin, for practical purposes, is constant.
With a greater use and a wider adoption of Bitcoin, the demand for bitcoins is always increasing. With a constant supply and increasing demand, the only factor in the equation that can change is the price of bitcoin: when going up. Therefore, assuming greater demand, the price of Bitcoin gradually increases in the long term.
The many functions of Bitcoin
Bitcoin has many functions and uses, but we will only consider those that are relevant to price fluctuations:
- Bitcoin payment network: Bitcoin as currency
- Storage and transfer of Bitcoin: Bitcoin as a warehouse of wealth and transmission of average value
- Bitcoin exchange rate: Bitcoin as a market and commodity instrument
Bitcoin payment network
Of course, transactions in the Bitcoin network do not directly affect Bitcoin’s market price. In the sense that an active Bitcoin network reflects a healthy protocol that enjoys a lot of use and demand, there is an indirect influence. Only when bitcoins interact with other currencies, in exchanges, is there a direct impact on the price of Bitcoin.
Every bitcoin exchange transaction involving the purchase of bitcoin through another currency, whether fiduciary or cryptocurrency, has the effect of raising the price of bitcoin. Because bitcoins are changing hands, from the purse wallet to the buyer’s wallet, there is a Bitcoin network transaction. However, it is the exchange transaction that counts for an increase in the Bitcoin exchange rate. Routine purchases are made daily, for various purposes, and generally increase towards the end of the month:
- Salaries of the company
- Replenishment of the wallet balance
- Purchase and retention purchases
- Incidental purchases for payment merchants
- Purchases intended for transmission
Sale of Bitcoin
Each exchange transaction involving the sale of bitcoin, that is, exchange by fiduciary or other cryptocurrency causes a drop in the price of Bitcoin. Consider the last example mentioned above, namely, the use of the Bitcoin network as a means of transmitting money.
Someone who works in the United States and pays in US dollars wants to send money to his family in Zambia. Instead of using the illustrious Western Union, opt for the Bitcoin payment network. No queues, no forms to fill, no proverbial rubber gloves and no extortion. They buy bitcoin through an exchange that offers BTC / USD, send the bitcoins to the Bitcoin address of a relative, and 30 minutes later the family member in Zambia exchanges some (or all) of the bitcoin for Kwacha through a local exchange that offers BTC / ZMK.
The original purchase of bitcoins would have caused a rebound (no matter how small) in the BTC / USD exchange rate. Half an hour later, the redemption sale through a Zambian stock exchange would cause a decrease in the BTC / ZMK exchange rate.
The previous example also serves to illustrate the effect of the flow of money that causes some currencies to increase at the expense of others. Here are some more routine bitcoin sales that exert a downward pressure on the Bitcoin exchange price:
- Merchants who accept Bitcoin
- Miners “charging” to pay bills and expenses with fiat
- Redemption of transmission bitcoin (as discussed above)
- Partial or total conversion of Bitcoin salaries to Fiat
Frequently it is alleged that merchants convert each and every one of the bitcoins that directly receive fiat due to the volatile changes of Bitcoin intraday prices. This seems like a good strategy, although it should be noted that a single financial policy is not applied to all companies. It is quite possible that some companies receive astute investment advice and maintain bitcoin amounts or channel them to investment funds. This would have the same effect as long-term bitcoin storage. The hoarding keeps bitcoins out of circulation and leads to price appreciation as the growing demand for a limited bitcoin supply increases the cost per unit.
In the case where merchants convert bitcoin receipts directly into fiduciaries, there is, in fact, a downward pressure on the price. However, it is balanced by the upward pressure caused by consumers (or their employers who pay bitcoins) who buy bitcoins for the purpose of possible expenses. If this market force does not constantly balance the price of Bitcoin, then the absurd implication would be that one of the main objectives of Bitcoin, namely to be a payment network, is also its ruin.
Trading of Bitcoin market instruments
The speculative market to negotiate the Bitcoin price chart is considerable. The performance of Bitcoin as a market instrument is spectacular and qualifies cryptocurrency as Supercommodity. No speculative instrument has achieved the phenomenal growth of Bitcoin. From the Bitcoin exchange rate of $ 0.08 in June 2010 to its historic high close to $ 1,150 in November 2013, it had grown by 1.4 thousand percent in less than three and a half years.
While the exchange transactions discussed in the previous section represent recurring monthly or daily expenses, their relative volume is minuscule compared to the millions of bitcoins that are bought and sold in the Bitcoin speculative market every month.
Buy-and-hold investors have been included in the previous category (instead of here) simply because their purchases and sales of bitcoin are rare. The current category includes, however, the first to adopt, a group that includes Satoshi Nakamoto and most of the early Bitcoin miners. Their holdings of bitcoins are considerable and their special status as founders of the Bitcoin network entitles them to take profits to buy houses, cars and other important purchases that are normally only available through the fiduciary payment.
The players that exercise influence over the Bitcoin price in this category are:
- Retail traders
- The first to adopt “charging” for fiat
- Institutional entities such as investment funds and ETFs.
Bitcoin and Big Brother
Due to an unfortunate accident in history, central banks and the government have become bedfellows. As a result, their activities and interests are intertwined, and their agent exercising control and exercising power became money. It is logical that any useful money that is not directly controlled by them is a problem.
Therefore, it is natural for the more remote authorities of the Old World to make Orwellian declarations and decrees to try to make the threat disappear. Smarter authorities opt otherwise by adopting Bitcoin, encompass it in their legal frameworks, create tax codes for the cryptocurrency and then encourage its use.
The prospect of regulation by regional or parastatal authorities seems to shake most Bitcoin users in their fiber optic boots, but they should remember that the Genie is already out of the lamp. Official statements and announcements of the following types often result in strong price movements:
- Statements from the government and the central bank
- Talk of regulation by parastatal bodies
- Legalese incomprehensible
- Speaking of taxes
Does the news move the price of Bitcoin?
News announcements often coincide with price movements in the market. There is some debate about whether the positivity or relative negativity of an informative announcement causes an ascending or descending movement of corresponding price. The evidence suggests that market participants are catalyzed by news announcements, but that the direction of the price movement is not generally related to the actual content of the news and is determined by the social mood at that time.
Observe, in the following table, how eBay “considering Bitcoin” apparently starts a rally, however, Dell, the largest IT retailer in the world, that really accepts the payment of Bitcoin leads to a mass sale.
The thrusts and pulls in the price of Bitcoin are diverse. Some are slow but stable, as the supply / demand curve gradually increases for a stable supply base of bitcoins. Others are violent and sentimental, like the speculative shops that see the purchase and sale of tens of thousands of bitcoins through exchanges every day.
The Bitcoin price chart shows a rising long-term average price despite the fact that often opposing forces exert their influence on the market. Traders and consumers balance the predominant buying or selling trend of the other.
Banks and governments are mostly reacting inappropriately to the interruption of Bitcoin. Some are embracing innovation while others are caught in arrogance.
Some aspects of Bitcoin, such as Contracts, have not been explored and promise to add additional value and, therefore, increase prices in the future.