How is the price of a Bitcoin determined?
How is it possible that Bitcoin is so expensive? And who determines how much a Bitcoin should cost? In this article, we will answer these questions…
How is the price of Bitcoin determined?
Because there is no central authority, there is also no central Bitcoin price. You can trade in Bitcoins on crypto exchanges of which there are hundreds. Each exchange can offer a different price, and at the same time, you can buy Bitcoins for different prices.
Because the market is transparent, you see that the Bitcoin prices on the different platforms quickly move towards each other. Fast traders can buy the Bitcoins from the cheap party and immediately sell them to the expensive party: this is called arbitrage.
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What factors determine the price of Bitcoin?
- Global demand and supply for Bitcoin
- The usefulness of the currency
- News reports in the media
- The influence of large investors
- Trust in traditional currency
- Pressure or support from the government
Bitcoin as a valid payment method
Bitcoins are not used as a valid payment method in any country. It is therefore strange that bitcoins, or BTC, still have a certain value. Just like in other markets, the price of Bitcoin is entirely determined by the game of supply and demand. When there is more demand than supply, you see that the price of Bitcoin rises.
Despite the fact that it is not a valid payment method, Bitcoin can still be used as an online exchange medium. Each user has their wallet with which it is possible to send bitcoins to other internet users via a unique address. More and more online webshops accept payments in bitcoins, and bitcoins also seem to be making their entrance into physical stores.
What is the maximum supply of Bitcoin?
The maximum supply of Bitcoin is always fixed at 21 million Bitcoins. Miners continually bring a small amount of new bitcoins into circulation. Periodically, the number of bitcoins added decreases, which means that the last bitcoins will not be in circulation until 2140.
Because the supply is already fixed, the chances are high that Bitcoin will increase in value in the long term. Normal currencies become less valuable due to inflation. Governments print new money, which causes the supply to increase further. With the same demand, you then see that the real value of the money decreases. We experience the consequences of this daily: you can buy much less for one euro now than 20 years ago.
With Bitcoin, this is less likely to happen: there is no central authority that can issue new coins after the 21 millionth Bitcoin. This should make Bitcoin more valuable and thus less susceptible to inflation.
However, currently, Bitcoin is not a realistic payment method: due to the strong fluctuations and volatility, you can also lose a significant amount in a short time with investments in Bitcoin.
The influence of large parties on Bitcoin
Currently, there are some large parties that hold the majority of Bitcoins. Crypto insiders also refer to these people as whales. When a whale sells a large number of Bitcoins at once, this can greatly affect the price.
As you now know, the price is determined by the game between supply and demand. However, the parties that own the largest number of Bitcoins can also exert the most influence on this interaction.
Is Bitcoin useful as a currency?
In practice, Bitcoin is not yet very useful as a currency: its use is too complex and transactions are slow to execute. The value is mainly determined by the large group of speculators who drive up the price. When confidence in Bitcoin temporarily decreases, you will see that the price can drop significantly.
If you are planning to invest in Bitcoin, it is therefore advisable to closely follow the latest developments. Do not look at how Bitcoin performs, but rather look at how the masses think Bitcoin is doing.
