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How is The Price of Bitcoin Determined? The Key Factors

Eric Huffman
Last updated: | 13 min read

Bitcoin investors have enjoyed a compound annual growth rate of 103% since 2011 when measured in USD. Returns in key years like 2017 reached nearly 5,500%. While the price of Bitcoin makes headlines, the reason for the price is often less understood. How is bitcoin price determined, and what determines the price of bitcoin relative to other asset classes?

Although Bitcoin’s price chart tells a tale of vast fortunes being made, in some years, the price of Bitcoin fell by more than 73%. Prices move both ways and often quickly. In this guide, we’ll explore what makes Bitcoin go up and down and ways to spot potential price trends to optimize your entry and exit strategies.

In Short: What Determines The Price of Bitcoin?


Like most other assets, Bitcoin’s price is driven by supply and demand. However, Bitcoin brings some unique features in that regard: fixed supply and worldwide demand.

  • Fixed supply: The maximum supply is capped at 21 million bitcoins, and this hard limit is enforced by a worldwide network of node operators. Supply changes would go against these node operators’ economic interests and are unlikely.
  • Increasing demand: Demand comes as a result of Bitcoin’s network effect. Bitcoin was the first mainstream cryptocurrency and continues to lead a crowded field with its $1.4 trillion market capitalization. For many crypto investors, Bitcoin marks the first purchase on their crypto investment journey. As traditional currencies increase supply, many expect Bitcoin’s price to appreciate as measured in traditional currencies.

What Drives The Price of Bitcoin?


In late 2021, Bitcoin (BTC) reached an all-time high above $69,000. By early 2023, the world’s largest cryptocurrency had fallen as low as $16,000. In context, Bitcoin first reached $1 in 2011; early buyers did quite well despite the price volatility. Recent price action also shows volatility, although the price of BTC more than doubled in the 12 months leading up to May of 2024, surpassing 2021’s all-time high.

btc price chart 2020 to 2024

But what determines Bitcoin’s price, and why does the market see such wild swings? Several factors influence the market price of Bitcoin and other cryptocurrencies, ranging from simple supply/demand dynamics to market sentiment and the regulatory environment. Let’s explore each of these to gain a better understanding.

Supply and Demand

Bitcoin’s supply is fixed at 21 million bitcoins. To date, about 20 million of these coins have been mined, with the balance to be mined by 2140. About 99% will be mined by 2032. The supply of bitcoins mined into existence halves every four years, reducing the amount by which the supply grows. This event is called the Bitcoin halving, and while it doesn’t reduce supply, it does push Bitcoin prices higher if demand outpaces the (smaller) increased supply.

As mentioned earlier, Bitcoin’s supply is coded in the Bitcoin Core software run by tens of thousands of nodes on the worldwide Bitcoin network. A change to the code to increase supply would result in a hard fork of the blockchain, as most nodes would remain on the old Bitcoin Core version with a 21,000-bit fixed supply. Hard forks of the Bitcoin blockchain, like Bitcoin Cash (BCH), which forked from Bitcoin in 2017, haven’t fared well compared to Bitcoin.

btc vs bch hard fork

Demand for Bitcoin over its forked chains remains strong, but much of this growing demand stems from Bitcoin’s properties: fixed supply and a worldwide decentralized network. No government controls Bitcoin’s network or its issuance, making Bitcoin an attractive alternative to traditional fiat currencies that can (and do) expand supply as governments borrow money.

Many investors refer to Bitcoin as a deflationary currency. While Bitcoin’s supply doesn’t shrink due to its code, an estimated four million bitcoins have been lost over the years due to wallet mishaps. However, Bitcoin has proven deflationary in regard to its purchasing power. In 2013, one bitcoin would have purchased a fast-food lunch with extra fries; today, one bitcoin can purchase a nicely appointed vehicle.

Bitcoin’s role as a store of value is reflected in the growth in Bitcoin wallets. According to Statista, the number of Bitcoin wallets grew to over 85 million by 2022, starting with nearly zero.

Market Sentiment

Although Bitcoin sees increased demand worldwide, market sentiment plays a role in the ups and downs you’ll see in the chart. If the market is bullish, Bitcoin prices generally increase. However, when prices reach a short-term top or if sentiment changes, the reversal can be swift.

One of the most popular ways to gauge market sentiment is through the Fear and Greed Index. Several variations on the concept exist, with each weighing specific criteria such as volatility, market momentum, and social media.

crypto fear and greed index

When the index enters the outer range of extreme greed or extreme fear, traders shouldn’t be surprised to see a reversal. The extremes point to a potentially oversold or overbought market.

Regulatory Landscape

While Bitcoin is decentralized, government actions can also affect prices. For example, the expectation and subsequent approval of spot Bitcoin ETFs (exchange-traded funds) for the US market helped push BTC from $26,000 to $60,000 in 2024. After these ETFs launched, the market made new all-time highs. Ethereum, the second largest cryptocurrency by market capitalization, saw a similar spike in market price as rumors of an Ethereum ETF broke.

Throughout 2023 and into early 2024, the US Securities and Exchange Commission (SEC) brought lawsuits against several major crypto exchanges, including Binance, Kraken, and Coinbase. The charges alleged the sale of unregistered securities and cooled an already tepid crypto market. Regulation and enforcement actions, justified or not, can affect the price of BTC and other cryptocurrencies.

Competition from Other Cryptocurrencies

Bitcoin dominance refers to the percentage of the entire crypto market represented by BTC. In Bitcoin’s early days, Bitcoin dominance approached 100%, as shown below.

bitcoin dominance chart all time

Today, Bitcoin dominance hovers around 55%, with the balance of the crypto market cap representing the tens of thousands of other crypto coins and tokens. Many of these are meme coins or shitcoins with no intrinsic value.

As investors diversify with other cryptocurrencies, they may sell some BTC holdings to finance these new positions. Competing blockchains like Ethereum and Solana take a piece of the pie. For example, the fully diluted market cap of ETH is now nearly $450 million.

Bitcoin Mining and Production Costs

Bitcoin mining is a costly endeavor when done at scale. Electricity cost estimates vary based on the price of electricity in a specific location. However, one recent estimate puts costs at close to $53,000 to mine one bitcoin. In situations where the costs are higher than the price of Bitcoin, miners will only sell what they need to sell to keep the lights on and hold the rest in hopes of better prices. This limits supply.

Mining also requires specialized equipment called Application-Specific Integrated Circuits (ASICs). These Bitcoin mining rigs need to be upgraded regularly to compete with other miners as the network hash rate increases.

In context, Bitcoin mining difficulty changes based on the network hash rate. If unprofitable miners stop mining, the hash rate could fall. However, the total hash rate for the Bitcoin network generally tracks the price of BTC.

bitcoin total hash rate

 

Institutional Adoption

Financial institutions have been slow to adopt Bitcoin as an asset, largely due to regulatory uncertainty and limitations on custody by certain types of financial service providers. With Bitcoin in particular, that could change following the launch of crypto ETFs, which solidifies Bitcoin’s status as a commodity rather than a security. Another hurdle centers on volatility. Individual investors may be able to weather the market’s ups and downs, whereas larger institutions may not be as willing to hold cryptocurrencies due to the volatility.

As more institutional investors around the world begin using Bitcoin as a store of value, settlement currency, or collateral, expect prices to reflect the increased demand.

How Did Bitcoin Get Value?


Bitcoin’s value as an alternative to fiat currency came the hard way, with a passionate but small group of believers pioneering the space.

In 2009, the year Bitcoin launched, a PayPal transaction for about $5 marked the first known Bitcoin purchase. Martti Malmi, a computer science student at the time, sold 5,050 bitcoins for $5.02. This transaction gave each bitcoin a value of $0.0009. By 2010, we saw the first Bitcoin exchanges, with larger exchanges like the now-defunct Mt Gox coming in 2011.

coinbase founder tweet

By 2012, Coinbase launched as a startup run out of a small apartment. Bitcoin’s price at the time was just $6.

How Do Halving Events Affect The Price of Bitcoin?


Bitcoin halving events reduce the amount of new Bitcoin mining rewards for each new block by half. The event happens about every four years. Thus far, Bitcoin’s price has surged following each halving, as seen in the chart below created by a TradingView user.

trading view bitcoin halving chart

  • 11/28/2012: Mining reward reduced from 50 BTC to 25 BTC
  • 07/09/2016: Mining reward reduced from 25 BTC to 12.5 BTC
  • 05/11/2020: Mining reward reduced from 12.5 BTC to 6.25 BTC
  • 04/19/2024: Mining reward reduced from 6.25 BTC to 3.125 BTC

Each halving reduces the amount of new bitcoins entering circulation. If demand continues to grow, prices increase due to the limited supply.

Who Controls The Price of Cryptocurrency?


The market controls crypto prices, initially by exchanging fiat currencies for cryptocurrencies or selling crypto for fiat currencies. Investors buy or sell according to the value they see in the investment. However, both decentralized and centralized exchanges also allow the traders to value crypto assets relative to other crypto assets. For example, you can trade a BTC/ETH pair on many exchanges or exchange ETH for the latest meme coin on decentralized exchanges.

  • Centralized exchanges: Market makers help keep spreads tighter on centralized exchanges by providing liquidity (trading inventory). Buyers and sellers then drive the prices.
  • Decentralized exchanges: On platforms like Uniswap, crypto investors provide liquidity to trading pools from which other traders can make swaps. In this case as well, the market determines the exchange rate based on demand or the lack thereof.

So, who controls the value of cryptocurrency? Unlike many markets where governments may have their thumb on the scale, crypto markets rely on the free market to determine cryptocurrency prices. If the world stops believing in the promise of decentralized currencies, market forces mean that the price of Bitcoin and other similar projects will trend toward zero.

Predicting Bitcoin’s Price Movement With Technical Analysis


Because crypto markets are still relatively small and a significant number of traders use technical indicators to guide their trades, technical analysis becomes helpful in timing trades. Let’s explore some of the simpler patterns and indicators that can predict the next price moves.

Chart Patterns and Indicators


Even the simplest chart patterns and indicators can help you choose entry and exit points for Bitcoin trades. These can include double tops and bottoms or head-and-shoulders chart patterns, as well as indicators like Moving Average Convergence/Divergence (MACD) or Relative Strength Index (RSI).

  • Double tops and double bottoms: Twin peaks or valleys often indicate a price reversal. In short, traders resisted higher or lower prices, so the price direction is likely to change.
  • Head and shoulders or inverted head and shoulders: Imagine a series of three mountain peaks with one taller peak at the center. That’s a head and shoulders chart pattern, and it usually indicates prices are going lower. Invert the head and shoulders to form valleys, and the indicator suggests higher prices are coming next.
  • Cup and handle: When a chart forms a cup-like shape followed by a smaller U-shaped handle, prices are expected to go higher. In some cases, the handle never forms and the chart continues a northward climb.
  • MACD: Most traders use MACD for shorter-term trades. As the lines cross, it marks a change in price direction. For a simple example, we can look at the MACD for the long-term chart. The MADC says to sell shortly after the peak and then to buy in late 2023. In this example, you’d miss a bit on each end by selling and buying a little later, but you wouldn’t have to ride BTC from $69,000 down to $15,000.

btc macd all time

  • RSI: Often used to indicate overbought or oversold conditions, RSI can help you fine-tune your trading strategy. In the example below, RSI signaled that BTC was getting top-heavy in mid-2021. By late 2021 and into 2022, BTC crashed hard.

btc rsi all time

Market Cycles and Trends

Like other markets, crypto goes through market cycles. However, in crypto, these moves can be more dramatic than you’re accustomed to seeing in the stock market.

  • Accumulation: During the accumulation phase, expect choppy markets. The chart isn’t really moving up or down significantly. Accumulation marks the beginning of a cycle, although it happens following a crash. In effect, the market has bottomed, and investors are buying at sale prices.
  • Uptrend (bull market): Following accumulation, a bear market brings higher highs and higher lows. Euphoria begins to build. The fear and greed index tips toward extreme greed. This phase is sometimes called a markup phase.
  • Distribution: Much like accumulation results in a choppy market, the top of the market often follows a similar trend. Buyers and sellers reach an equilibrium that prevents prices from falling too far — yet. Smart sellers are unloading, however, gradually selling into the top.
  • Downtrend (bear market): Also known as the markdown phase, a bear market sees lower lows and lower highs until it reaches a point of capitulation. When the price won’t go down further, accumulation begins and the cycle repeats.

It is worth noting that dozens of factors can affect the value of Bitcoin and other crypto assets during these phases. However, it’s helpful to be aware of the big picture. Day-to-day price fluctuations are part of the larger market cycle.

Conclusion


So, what drives Bitcoin’s price? Ultimately, the price of BTC is the natural result of supply and demand. However, Bitcoin brings some special properties that suggest higher prices ahead in the long term. With a limited supply of just 21 million bitcoins and a worldwide network of miners securing the network, Bitcoin remains one of the most promising investments in the crypto space.

From a demand perspective, as adoption increases for both individual and institutional investors, that limited supply will force prices higher. The good news is that each bitcoin is divisible, so there’s enough for everyone — although likely a bit less of it as adoption increases.

FAQs

Who decides the price of Bitcoin?

Bitcoin’s price is driven by the market of buyers and sellers. A finite supply of just 21 million bitcoins helps drive prices north when demand increases. However, like other markets, crypto markets have cycles in which prices can head higher or lower depending on where we are in the cycle.

What factors influence the price of Bitcoin?

Bitcoin’s price can move based on news or changes in the regulatory environment as well as natural bull/bear cycles for cryptocurrencies. The introduction of Bitcoin spot ETFs in the US could lead to greater adoption as well as higher prices and reflects a change in the regulatory environment.

Why does Bitcoin have value?

Bitcoin is an alternative to traditional currencies. Most of the world uses a deb-based currency system that must inflate to service the interest on the debt. By contrast, Bitcoin has a fixed maximum supply of 21 million bitcoins. If Bitcoin continues to gain acceptance, the price of goods and services will go down when they are priced in bitcoin. By contrast, traditional currencies force prices to go up over time as the supply of the currency increases.

How does the Bitcoin price go up?

Bitcoin’s price goes up as more buyers than sellers transact on crypto exchanges. Fewer sellers relative to the number of buyers force prices higher.

Who owns the most Bitcoin?

Satoshi Nakamoto, the pseudonymous person or group that created Bitcoin, owns the most bitcoins. Estimates indicate that nearly 1.1 million bitcoins were mined in the early days following Bitcoin’s launch. These bitcoins remain untouched.

References

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