The price of bitcoin has risen above $87,000 for the first time as it benefited from traders’ hopes that Donald Trump will favour cryptocurrencies when he is sworn in back to White House. Bitcoin reached a record high of $87,198, before slipping back slightly on Monday this week.
If you’ve ever checked the price of Bitcoin or Ethereum, you’ve probably experienced a mix of awe, confusion, and maybe even a little panic. One minute it’s up, the next minute it’s down. One day Bitcoin is worth $60,000, and the next it’s plummeting to $40,000. So, what on Earth determines the price of these digital coins? How does a cryptocurrency go from being worth a pizza to worth more than a house?
In this article, we’re going to break down how cryptocurrency prices are determined, so you can finally stop asking your friend who’s “super into crypto” (but isn’t much help with explanations). Let’s dive in!
Supply and Demand: The Basics of Crypto Pricing
At the most basic level, the price of a cryptocurrency is determined by supply and demand—just like any other asset, whether it’s gold, real estate, or even vintage Star Wars action figures (which can get pretty pricey, by the way).
When more people want to buy a certain cryptocurrency (demand), but the number of coins available is limited (supply), the price goes up. Simple economics. But when demand drops or the supply increases, the price can drop as well.
For example:
• Bitcoin (BTC) has a fixed supply of 21 million coins. This scarcity creates demand and is one reason why Bitcoin’s price has skyrocketed over the years. It’s like trying to get your hands on the last slice of pizza at a party—everyone wants it, but there’s only one slice left.
• Ethereum (ETH), on the other hand, doesn’t have a fixed supply, but it has a robust use case (more on that in a second) that drives demand.
Supply Side: The Limited Number of Coins
Not all cryptocurrencies have the same supply model. While Bitcoin’s total supply is capped at 21 million coins, other cryptocurrencies like Ethereum or Cardano have different rules. Some coins, like Litecoin (LTC) or Bitcoin Cash (BCH), have fixed limits, while others have more flexible inflation models.
The supply side is key because, unlike traditional currencies (which can be printed by governments), crypto’s supply is often strictly controlled. This built-in scarcity can make certain cryptocurrencies more attractive, as it’s harder for inflation to erode their value.
Demand Side: Who Wants the Coins?
The demand for cryptocurrency is driven by a number of factors:
1. Market Sentiment
The hype around cryptocurrency can be a huge driver of demand. When people see others getting rich (or hear about that one guy who bought Bitcoin for $1 and is now a millionaire), they often jump on the bandwagon. This creates a “FOMO” (fear of missing out) effect, which can skyrocket the price in a matter of hours.
Example: Remember when Dogecoin started trending thanks to Elon Musk’s tweets? Dogecoin, which started as a meme coin, suddenly saw a surge in price because people rushed in to “get rich quick.” It was the digital equivalent of everyone showing up at a party because the cool kid said they were going.
2. Adoption and Use Cases
A cryptocurrency’s real-world utility can influence demand. If a crypto can solve an actual problem, it becomes more valuable. For example, Ethereum isn’t just a store of value like Bitcoin; it’s a platform for building decentralized applications (dApps) and smart contracts, which drives demand. The more people use Ethereum for things like decentralized finance (DeFi) or NFTs, the higher the demand—and the price.
3. Speculation
Many crypto investors buy digital currencies with the hope that they will rise in value over time. This speculative demand can cause big price swings. Speculators may buy a coin thinking it will increase in value, which drives the price up, but when they sell, the price can crash just as fast.
4. Media and Public Perception
Positive media coverage can spark excitement and boost demand, while negative news (like a government crackdown or a hack) can lead to price drops. Cryptos like Bitcoin and Ethereum are often sensitive to these factors. For instance, when Tesla announced it had bought $1.5 billion in Bitcoin, the price surged. When China cracked down on cryptocurrency mining, prices fell.
Market Liquidity: How Easy Is It to Buy and Sell?
Market liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. High liquidity means that there are plenty of buyers and sellers, making it easier to trade without large price swings.
For cryptocurrencies with high liquidity, like Bitcoin or Ethereum, prices tend to be more stable (relatively speaking). For smaller, lesser-known coins (also known as “altcoins”), the price can be more volatile because there may not be as many people trading them.
Example: Let’s say you’re trying to buy a rare, limited-edition trading card. If there are only a handful of people selling it and you have to buy it from one of them, you might end up paying more than you’d like. But if there were thousands of cards on the market, you’d likely have more bargaining power, and the price would be more stable.
Market Manipulation: Pump and Dump Schemes
Let’s be real for a second—cryptocurrency markets can be a bit of a Wild West. Sometimes, bad actors try to manipulate prices. A “pump and dump” scheme is when a group of people buys up a certain cryptocurrency (the “pump”), driving up the price, and then quickly sells off their holdings (the “dump”) to make a profit.
This is often seen in smaller, less liquid coins where it’s easier to move the market. While these kinds of schemes are illegal in traditional finance, crypto markets are still relatively unregulated, so they happen occasionally.
Example: Remember when a coin called Shiba Inu (SHIB) gained huge popularity seemingly overnight? Some speculators pumped its price by buying up large quantities, only to dump their holdings once they had made a profit, leaving latecomers with bags of coins that had lost their value.
Supply and Demand in Action: Why Is the Price of Bitcoin So High?
Bitcoin’s price is a perfect example of the supply and demand theory in action.
• Scarcity: With only 21 million Bitcoin available, it’s limited, and as demand grows, so does its price. It’s like trying to buy a concert ticket for your favourite band, but only 1,000 tickets are available. The more people want them, the higher the price goes.
• Mainstream Adoption: As more companies and institutions start accepting Bitcoin (hello, PayPal and Tesla), demand increases. More users mean more transactions, which can further increase Bitcoin’s price.
• Speculation and Media Buzz: Every time a major corporation or billionaire like Elon Musk backs Bitcoin, the price tends to surge. Similarly, if news outlets report a government crackdown, the price might drop, which just adds to the wild swings.
Final Thoughts
So, how does the price of a cryptocurrency get determined? Well, it’s a combination of supply and demand, market sentiment, media influence, and real-world utility. While the market can be volatile and unpredictable, these factors help give us a better understanding of why the price of your favourite digital coin is up one day and down the next.
Remember, whether you’re investing in Bitcoin, Ethereum, or the latest meme coin, always do your research before diving in. After all, investing in crypto isn’t unlike riding a roller coaster—you just have to buckle up, hold on tight, and enjoy the ride (while hoping you don’t lose your lunch).
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