D: You probably wondered where Bitcoin (and other cryptocurrencies) prices come from. Take a look at both technical and financial aspects.
From the technical point of view, it’s important to say that Bitcoin uses blockchain technology. Distributed ledgers are trusted, and people nowadays understand that BTC cannot be rigged in any way. It cannot be manipulated. Simply put, the technology works, and that’s a good start to give something value.
Then, there’s the financial aspect of this. At this point, it’s important to ask the question: how does anything get its value? Who decided that diamonds have to be expensive? Why is gold more expensive than silver?
The short answer is: people are the ones who give things monetary value. This applies to Bitcoin and other cryptos. Still, there are a couple of things that actively influence the price and determine the worth of Bitcoin and other digital coins. Let’s take a look at them in detail.
Supply and Demand
Some people want to buy a product, service, or even an asset. Others can sell them. If the number of buyers outweighs the number of sellers, the prices will go up. Sellers know that their merchandise is in demand and will sell it to the highest bidder. If the number of sellers is bigger than the number of buyers, the price of goods goes down simply because buyers can find enough options.
That’s how the value of Bitcoin and all other cryptocurrencies is determined. Simply put, if there are too many people wanting to buy BTC, its price goes up.
Scarcity is somewhat related to supply and demand. It’s an economic concept that means that some goods are limited in supply. This is the case with the majority of cryptocurrencies, giving them value. For example, the total supply of BTC that will ever be produced is 21 million. Moreover, there’s a pattern of how new coins are mined, so active traders will have to deal with the current circulating supply (which is 18.6 million at the moment).
Cryptocurrencies are still not regulated in most parts of the world, and that could affect their prices, depending on how governments classify them. For example, the SEC (The Securities and Exchange Commission )considers cryptos to be securities, and the CFTC thinks of them as a commodity — there’s no unified view on this in many countries.
If cryptocurrencies are fully legalized, this will allow standard investors to buy them, which will further increase demand. Moreover, recognizing and legalizing cryptocurrencies could reduce volatility.
Availability on Exchanges
To trade cryptocurrencies, investors use all kinds of centralized and decentralized exchange platforms. They select an exchange based on the cryptos that are available on them, as well as many other aspects (fees, security, and more). After they pick a service, they actively go through cryptocurrency prices and make trades that they believe will bring them a profit.
However, some cryptocurrencies aren’t listed on all exchanges, and this could also affect their price. If they become available on one such platform, the number of potential investors will increase, and its price will go up.
The number of investors increases and decreases based on the hype surrounding cryptos. For example, when BTC first peaked in December 2017, media around the world started actively reporting on “digital gold.” That was the reason why many people became interested in it in the first place. When there’s no hype, the prices go down.
Hype is sometimes used to make the price superficial. A new cryptocurrency can create hype, and many people will invest, but that will be short-lived.
The majority of crypto investors aren’t experienced in this activity. That’s why hype plays such a big role in determining the value of digital coins.
Bitcoin and many other cryptocurrencies don’t have a central authority. Instead, people who decide on the state of the networks are developers, miners — basically, anyone can become a “node” in the distributed ledger and have a vote. When some software changes are about to take place, that could affect the price of cryptocurrencies. For example, forking is one of the main changes in the network. It often results in creating new cryptos and, as such, affects the prices. Bitcoin Cash was created via a fork on the Bitcoin network.
To sum up, many things give value and affect the price of cryptos. If you want to become a crypto trader, the best thing you can do is take them all into account, follow the latest news, and pick a great cryptocurrency exchange to make your first steps.