The price of bitcoin varies freely according to supply and demand. When demand increases, or when supply falls, the price of Bitcoin increases. Conversely, when demand falls, or when supply increases, the price of Bitcoin falls.
The monetary issuance policy on Bitcoin is defined in advance, maintained by consensus, and limited to a total of 21 million units. Ultimately, the price of Bitcoin will be supported by an unyielding total supply.
Unlike state currencies or other financial assets, on Bitcoin, no central authority can unfairly issue more units of account than expected. When the bitcoin issuance is over, there will be no more downward price pressure from money printing.
Why is the Bitcoin price volatile?
It is not uncommon to observe strong variations in the price of Bitcoin, both up and down. These movements are explained by the fact that Bitcoin is a young and free monetary system. No institution can regulate its course. Thus, the price of Bitcoin is determined exclusively by supply and demand.
Unlike other currencies and financial assets, its frequency of issuance is defined in advance and completely inelastic. The creation of bitcoins is therefore insensitive to fluctuations in demand. When it increases, the production of new bitcoins does not adapt. This is why we can sometimes witness sudden surges in the price of Bitcoin.
Who determines the price of Bitcoin?
Since no institution has control over Bitcoin, the price of its currency can be freely determined by anyone. There is no single indicator that is true for everyone.
However, by consensus, the price of Bitcoin is generally determined by performing a weighted average based on the sales volumes of all the latest prices on the marketplaces. They themselves are determined by the law of supply and demand, as could be observed on the Dollar, the Euro or even the shares.
These prices naturally tend towards the same sum since users can make trade-offs between trading platforms. Thanks to this mechanism, you will find almost the same price on the different marketplaces.
Why does bitcoin have value?
First, it is important to note that value is a subjective concept. Property that is valuable to me may not be valuable to you. This concept depends on the judgment of its observer at any given moment.
The value of a bitcoin should therefore reflect that of the monetary system. It is explained by the trust that people have in the Bitcoin protocol, its network and its currency.
Each user has their own reasons to justify this trust. Some believe that the latter has value because its system is very secure thanks to the large computing power deployed. Others rather like its value proposition as an incensurable payment protocol. Some also have confidence in its network thanks to its wide deployment around the world. Finally, we can also assign value to it simply since its currency, Bitcoin, has a limited total supply. This makes it an extremely rare asset.
On Bitcoin, the currency is issued by miners when a block is created. Payment transactions on this system must be timestamp in the distributed account register in order for them to be confirmed. This register takes the form of a blockchain, it is the famous “Blockchain”. Thus, the role of miners is to gather transactions awaiting confirmation in a block, and to meet a condition allowing it to be added to the register of all participants.
The aim is for this condition to require an average of 10 minutes of working time to be met. But I'll tell you more about it in a future post. Here, you can simply remember that transactions are collected in a block, and that on average every 10 minutes, a new block is added to the ledger.
This work carried out by the miners requires the use of electricity and the investment in computer machines. It is therefore necessary to be able to pay them in exchange for this work. This is why, when a miner meets the condition allowing him to add a block to the register, he receives a bitcoin reward. This consists of two parts: the transaction fees included in the block and the creation of brand new bitcoins. That's how bitcoin is issued.
Miners are still subject to a rule: they cannot create more bitcoins per block than the amount predefined in the protocol. This is what makes it possible to regulate the monetary issuance of bitcoins.
This program is punctuated by what we call the”Halvings”. A halving is an event that occurs approximately every four years, dividing the amount of bitcoins created in each block by two. As a result, monetary issuance on Bitcoin is degressive. There are fewer and fewer bitcoins created over time. The consensus ensures that the total limit to this emission is set at 21 million units.
Conclusion
The price of Bitcoin fluctuates freely according to supply and demand. Its price is generally determined by taking a weighted average of all the latest prices on the marketplaces in relation to the sales volumes.
Bitcoins are issued by miners when a block is created. The amount that they are allowed to mine is determined in advance in order to contain money creation. The latter is reduced by half about every 4 years during an event called “the halving”. It is this mechanism that makes it possible to ensure the degressiveness of the monetary issuance of bitcoins.
Bitcoin's total money supply is consensually limited to 21 million units. In the long term, there will therefore be no more Bitcoin being issued. Supply will be completely inextensible in the face of demand. For this reason, many people consider Bitcoin to be a rare asset and use it as a long-term store of value.
