In brief
- Bitcoin prices are driven by the same principles of supply and demand that govern the cost of goods and services, exchange rates, etc.
- Price discovery is now determined primarily on centralized crypto exchanges (CEXs).
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The Bitcoin blockchain went live on January 3rd, 2009. At its inception, the Bitcoin network started releasing its own eponymous currency or money. Every ten minutes, the network released 50 BTC to a tiny community of cryptography enthusiasts. Although starting from humble beginnings, its creator Satoshi Nakamoto had an ambitious goal for Bitcoin to be a “peer-to-peer version of electronic cash” for the world.
At first, Bitcoin didn’t have a set monetary value because there wasn’t a marketplace for BTC. Without goods and services being offered for Bitcoin, it was difficult—if not impossible—to determine its price in a fiat currency such as the U.S. dollar (USD).
Market Forces Determine Prices
The cost of goods, fiat exchange rates (USD to EUR for example), and the spot price of commodities (such as corn and oil) are determined by the laws of supply and demand. When in-demand supplies are created in surplus, prices typically go down when demand remains constant. Likewise, a supply shortage tends to make prices appreciate (assuming demand remains constant). This dynamic also holds true for BTC and other cryptocurrencies.
Bitcoin Price Markets: Then and Now
On May 22, 2010, 10,000 BTC were exchanged for two pizzas in what is widely considered the first BTC purchase (at the time, one BTC was worth $0.004). Subsequently, others started accepting goods and services in exchange for Bitcoin which created a market big enough for robust price discovery — which is simply the free market method for determining an asset’s price. Since then, people have purchased everything from luxury goods to real estate using BTC.
Since 2010, the price has risen dramatically as demand has typically outpaced supply. From July 2020 onwards, the Bitcoin price has remained above $10,000 and reached an all-time high price of $69,990.90 in November 2021. Eschewing BTC-to-pizza markets, price discovery is now determined primarily on centralized crypto exchanges (CEXs) where BTC is traded for fiat (USD, EUR, KRW) and a variety of other cryptocurrencies such as ether (ETH) and litecoin (LTC).
Why Is BTC in Demand?
Put simply, many who purchase and use BTC view it as a fiat currency and payment system alternative. With its limited supply and decentralized nature, some purchase it as an inflation hedge, store of value, or as an investment. Others who have lost confidence in their banking system or national currency prefer an asset that is difficult to confiscate and doesn’t need a trusted third party to make transactions.
Bitcoin Price Predictions Vary Widely
From being called a “global reserve currency” to “absolutely worthless,” Bitcoin price forecasts vary from zero to over $1 million. Ultimately, the opinions of Bitcoin proponents and detractors won’t determine the price. Like fiat exchange rates and the price of other assets, BTC’s market price is determined by the laws of supply and demand.