6. What determines the price of Bitcoin?
Since Bitcoin isn't regulated by any central bank, its price is formed by market supply and demand.
1) Supply. New Bitcoins are mined every day. A more correct way to put this is that the system automatically generates Bitcoins and gives them to miners as reward for the work. (For details on what it is that miners do, see Section 5.2).
Miners sell these Bitcoins at crypto exchanges – mostly for US dollars. That's their main source of income.
You could say that Bitcoin has inflation, just like fiat currencies do – after all, the number of Bitcoins in circulation grows every day. The big difference is that the rate of inflation falls over time.
Every 4 years (give or take), the reward for miners is cut in half – this is called halving. The next one is coming in May 2020. With each new halving, twice fewer new Bitcoins are produced, so the inflation rate is cut in half. Traditionally the price of BTC grows strongly after each halving.
The rate of BTC inflation will keep slowing down until the total global supply reaches 21 million. From that point onwards, nobody will be able to create new Bitcoins. This will happen around the year 2140.
2) The demand for BTC on crypto exchanges comes from different types of buyers. They include regular private investors, large institutional investors ('whales'), speculative traders, etc. t's just like buying stocks: some buy Bitcoins and hold them for years waiting for the price to grow. Others sell almost immediately for a small profit.
There are many factors that impact demand and, therefore, the price.
- Uptrends and downtrends: the whole crypto market goes through bullish and bearish cycles, like the stock market.
- Bubbles: in December 2017, the price reached $20,000. The bubble burst, people started selling off BTC in panic, and the price fell by 65%.
- Manipulations. A single large buy or sell by a 'whale' can change the price of BTC by 10% or more.
- Geopolitical factors. During periods of global uncertainty (such as the coronavirus), many people sell stocks and buy Bitcoin or gold. This spike in demand causes the price to rise.
- Tech innovations and regulatory news. The price can rise if a country announces that it will make Bitcoin legal, or if there is a technological development that will make it work faster, etc.