What Determines the Price of 1 Bitcoin?

What Determines Bitcoin’s Price?
Bitcoin (BTCUSD) is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator (or creators) of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and proves ownership.1

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different from purchasing a stock or bond, because Bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form 10-Ks to review.

KEY TAKEAWAYS
Purchasing a stock grants you ownership in a company, whereas purchasing a bitcoin grants you ownership of that cryptocurrency.
Bitcoin is neither issued nor regulated by a central government and therefore is not subject to governmental monetary policies.
Bitcoin’s price is primarily affected by its supply, the market’s demand for it, availability, and competing cryptocurrencies.
There is a finite number of bitcoin, and the final coins are projected to be mined in the year 2140.2

Understanding What Determines Bitcoin’s Price
Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to Bitcoin. Conversely, Bitcoin prices are influenced by the following factors:
The supply of Bitcoin and the market’s demand for it
The cost of producing a bitcoin through the mining process
The rewards issued to Bitcoin miners for verifying transactions to the blockchain
The number of competing cryptocurrencies
Regulations governing its sale and use
The state of its internal governance
News developments

TABLE OF CONTENTS
What Determines Bitcoin’s Price?
Bitcoin (BTCUSD) is a cryptocurrency developed in 2009 by Satoshi Nakamoto, the name given to the unknown creator (or creators) of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and proves ownership.1

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different from purchasing a stock or bond, because Bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form 10-Ks to review.

KEY TAKEAWAYS
Purchasing a stock grants you ownership in a company, whereas purchasing a bitcoin grants you ownership of that cryptocurrency.
Bitcoin is neither issued nor regulated by a central government and therefore is not subject to governmental monetary policies.
Bitcoin’s price is primarily affected by its supply, the market’s demand for it, availability, and competing cryptocurrencies.
There is a finite number of bitcoin, and the final coins are projected to be mined in the year 2140.2
Understanding What Determines Bitcoin’s Price
Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to Bitcoin. Conversely, Bitcoin prices are influenced by the following factors:

The supply of Bitcoin and the market’s demand for it
The cost of producing a bitcoin through the mining process
The rewards issued to Bitcoin miners for verifying transactions to the blockchain
The number of competing cryptocurrencies
Regulations governing its sale and use
The state of its internal governance
News developments

Factors That Affect the Price of 1 Bitcoin
Investopedia / Alison Czinkota

Supply
The supply of an asset plays an important role in determining its price. A scarce asset is more likely to have high prices, whereas one that is available in plenty will have low prices. Bitcoin’s supply has been dwindling since inception. The cryptocurrency’s protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time. Thus, the supply of Bitcoin slowed from 6.9% in 2016 to 4.4% in 2017 and 4% in 2018.3 Bitcoin halving events, which occur every four years, generally correspond to a significant bump in its prices because it means that the cryptocurrency’s supply has been reduced.

Demand
While Bitcoin has yet to find favor as a medium of exchange, it has attracted the attention of retail investors. The locus of Bitcoin’s demand shifts based on economic and geopolitical considerations. For example, China’s citizens may have reportedly used the cryptocurrency to circumvent capital controls in 2020. Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela.5 It is also popular with criminals who use it to transfer large sums of money for illicit activities. Finally, investor demand for the cryptocurrency has also risen with increased media coverage.
All of this means that shrinkage in supply has coupled with a surge in demand, acting as fuel for bitcoin prices. Alternating periods of booms and busts have become a feature of the cryptocurrency ecosystem. For example, a run-up in bitcoin’s prices in 2017 was succeeded by a prolonged winter.

Cost of Production
Just as for other commodities, the cost of production plays an important role in determining the price of bitcoin. According to research, bitcoin’s price in crypto markets is closely related to its marginal cost of production.6

For bitcoin, the cost of production is roughly a sum of the direct fixed costs for infrastructure and electricity required to mine the cryptocurrency and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of miners competing to solve a complex math problem—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees that have accumulated since the last block was found.

Arriving at a solution to the problem requires brute force in the form of considerable processing power. In monetary terms, this means the miner will have to spend money on racking mining machines equipped with expensive processors. The bitcoin-mining process also incurs costly electricity bills.

According to estimates by some sites, electricity consumption for the bitcoin-mining process is equal to or more than that of entire countries.7 An indirect cost of bitcoin mining is the difficulty level of its algorithm. The varying difficulty levels of bitcoin’s algorithms can hasten or slow down the rate of bitcoin production and affect its overall supply, thereby affecting its price.

Competition
Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for crypto investment dollars. As of 2022, Bitcoin dominates trading in cryptocurrency markets.8 But its dominance has waned over time. In 2017, Bitcoin accounted for more than 80% of the overall market capitalization of crypto markets. By 2021, that share was down to less than 50%.
The main reason for this was an increase in awareness of and capabilities for alternative coins. For example, Ethereum’s Ether (ETHUSD) has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) tokens. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether, the cryptocurrency used as “gas” for transactions on its network. On Oct. 13, 2021, Ethereum accounted for almost 18% of the overall market cap of cryptocurrency markets.9

Ripple’s XRP (XRPUSD) and Cardano’s ADA (ADAUSD) have also surged in popularity, while growth in stablecoins had attracted investor attention toward Binance’s BNB token (BNBUSD).
Even though it has siphoned away investment dollars from the Bitcoin ecosystem, competition has also attracted investors to the asset class. As a result, demand and awareness about cryptocurrencies have increased. As a standard-bearer of sorts for the cryptocurrency ecosystem, Bitcoin has benefited from the attention, and its prices have surged.