What Determines Bitcoin’s Price? And Why Does It Fluctuate?

Published 9:05 am Thursday, May 16, 2024

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One day, Bitcoin could be soaring to new highs, and the next, it could crash by 20% or more before rebounding again. For new investors, all these dizzying ups and downs can be seriously confusing and stressful to try to make sense of.

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But don’t worry, I’ve got you covered. By the end of this article, you’ll understand the key factors that impact Bitcoin’s price movements and volatility. Once you know the logic behind why the price fluctuates, it becomes way less daunting and more accessible to handle those swings and trade on apps like Immediate Export App like a pro.

So, let’s jump right into breaking down what determines Bitcoin’s pricing and volatility!

It’s Simply Supply vs. Demand

At its core, Bitcoin’s price is determined by the basic economic forces of supply and demand, just like that of literally any other investment asset or commodity.

The price quoted on exchanges is simply what someone is willing to pay for Bitcoin at that very moment. If buyers demand more than the available supply put up for sale, the price goes up until equilibrium is reached. If supply overwhelms demand, the price drops until buyers return.

That makes sense. It’s the same fundamental principle behind why prices fluctuate for stocks, gold, real estate, and anything else bought and sold.

But what exactly influences that supply and demand equation for Bitcoin? Well, there are several key factors at play:

  • Limited & Predictable Supply

On the supply side, Bitcoin’s production is strictly limited and predictable. The Bitcoin protocol’s code stipulates that only 21 million BTC can be mined and manually issued into circulation.

Unlike the U.S. Dollar, Bitcoin’s predictable, regulated issuance schedule means a central authority cannot arbitrarily inflate its supply. This limited and predictable supply significantly drives its value proposition and pricing mechanism.

The trends in supply distribution also impact pricing. If Bitcoin “whales” (folks holding massive amounts) start selling off and flooding the market with supply, it places downward pressure on the price. Conversely, if miners and investors have, reduced supply raises the price.

  • Speculation, Utility, & Public Perception

While supply is a huge factor, demand is the far more dynamic and volatile influence on Bitcoin’s pricing at any given moment. There are a few significant components that shape demand:

  1. Speculation—Like many emerging assets without cash flows or revenue models, Bitcoin’s price is heavily shaped by speculation from investors betting on its future utility and adoption. Market psychology, fear, and greed all contribute to ever-shifting speculation.
  2. Use Case & Mainstream Adoption – As Bitcoin’s utility and real-world use cases expand through mainstream adoption as a store of value, trading vehicle, etc., demand increases to match its growing relevance.
  3. Public Perception—How Bitcoin is portrayed in the media, social sentiment, influencer voices, and the public zeitgeist impact demand by shaping the narrative and perception surrounding it.
  • Mining Cost & Competition

Another factor pulling strings on Bitcoin’s pricing is the dynamics of the mining economy and competition. 

The energy costs and hardware resources required to mine new Bitcoins form a baseline production cost that impacts miners’ incentives to keep mining. If Bitcoin’s price is too low, it becomes unprofitable for many miners to keep expanding resources to mine it, thereby reducing new supply issuance.

Higher Bitcoin pricing incentivizes more miners to join the race, boosting computing power behind the network and bringing newly minted supplies to the market—alternatively, lower pricing disincentives mining and supply inflation.

  • Institutional Investment Influence

You’ve also got to account for the rising role of institutional money, legacy finance titans, and publicly traded companies in the Bitcoin markets. These huge “whale” players have the capital reserves to substantially sway prices.

  • The Long-Term Trend Prevails

While all of those factors collide to contribute to Bitcoin’s short-term pricing swings and volatility, it’s important to zoom out and examine the longer-term trajectory within which those fluctuations occur.

In Conclusion

At the end of the day, you have to accept that Bitcoin’s price will always experience some degree of volatility and fluctuation in both directions. It’s simply the nature of how Bitcoin’s supply and demand drivers interact in its pricing model.

No one can consistently call Bitcoin’s tops and bottoms with reliable accuracy, but these tips will help you stay safe when trading on the Immediate Export App.

Instead, the most innovative strategy for investors is to embrace those fluctuations as routine, withstand the volatility by removing emotion from their decision-making, and stay focused on Bitcoin’s significant long-term trajectory, which continues to rise.