Unlike conventional currencies, Bitcoin - the world’s largest cryptocurrency - is not issued by a central bank or backed by a central authority or a government that could determine its value. Monetary policy, inflation, economic growth and other macroeconomic data or political developments that typically shape the value of a conventional currency do not have a similar influence in the case of cryptocurrencies. It’s not a conventional currency, but it’s also not a corporation. Therefore buying Bitcoin is also different from purchasing a stock or bond, in that it has no “fundamentals” that would determine its price.
Bitcoin is backed up by a decentralized system, the blockchain, which sets out strict rules on how transactions are entered into the ledger and how Bitcoin tokens can be created, or mined. No single bank or central government controls the flow and “minting” of Bitcoin tokens. It is rooted in a rules-based blockchain backed up by a network of computers.
What is Bitcoin’s supply cap?
What influences Bitcoin’s price are the basics: supply and demand. When there is more demand for Bitcoin, the price goes up, and vice versa. New Bitcoin tokens are created at a certain rate which is designed to slow down over time. This is due to the principle of halving, which means that the rewards offered to Bitcoin miners who verify transactions and help “mint” new coins is halved every couple years to slow down the supply.
Over time, this will lead to an increase in demand and therefore price. Ultimately, a total of 21 million Bitcoin tokens are planned to enter into circulation. Once this number is reached, mining activities will cease, though this is not expected before 2140.
Demand for Bitcoin and therefore its value can be also influenced by the availability and popularity of other cryptocurrencies.
Why is Bitcoin's price going up and down?
Bitcoin's price is highly volatile. It is a high-risk asset, so be aware if you decide to invest in it that you can lose all your money. Demand can go up and down depending on economic and political events, but sometimes even just a tweet from Elon Musk, the CEO of Tesla Motors, can send Bitcoin into a downward spiral. Media hype and speculation can also yank Bitcoin’s price up or down.
Bitcoin is also a very liquid asset, meaning you can buy it and sell it quickly. It means investors can enter and exit their positions quickly, adding to the high volatility. It also means that large traders’ moves can influence the market to a significant extent, making it easy for people to manipulate the market.
This volatility can also be a problem if you’re trading crypto in the form of futures or CFDs (contracts for difference). Spot Bitcoin is traded 24/7, but futures or CFDs are not; this means that big changes in the price of spot Bitcoin outside the trading hours of CFDs or futures can result in big losses in the value of your Bitcoin CFD or futures contracts.
Because Bitcoin's price is set by the market, pinning down the exact price can be complex because the price can vary according to exchanges. They all base their average price on the trades being made on their platform. Indexes determine an average price from various exchanges.