Understand the price and how is the price of Bitcoin determined

_{Photo: CoinMarketCap (Screenshot)}

The course of Bitcoin, how it works? What gives its value to this cryptocurrency? Why does the price go up or down? And why is there such volatility, so big price differentials from one week to the next?

All these questions that we can ask ourselves when we arrive in the cryptosphere are very legitimate. We must first understand that Bitcoin is a cryptocurrency that is very young (10 years in 2019), which is different and based on a revolutionary principle that is at the antipodes of the functioning of traditional currencies.

Bitcoin, a revolutionary concept

First of all, remember that Bitcoin was invented in 2019 by the mysterious Satoshi Nakamoto. Although this pseudonym has Japanese sounds, we do not know anything about his true nationality. Is he Japanese, American or Spanish, many speculate, no one really knows. In the same way, we do not know if it's a woman, a man or a collective. Still, Satoshi has created a computer protocol called Bitcoin. Thanks to this protocol, it is possible to transfer from peer-to-peer (from individual to individual) value via a secure network called blockchain.

It is on this chain of blocks, imagine a large account register open and decentralized, that are recorded all transactions that are made between individuals who exchange value. Every ten minutes or so a block is created and is linked to the previous block, hence the image of the block chain. Each time a new block is generated, a certain number of bitcoins are created at the same time.

Unlike what happens in so-called traditional finance, bitcoins are not issued by a bank or backed by a government. Bitcoin is a free computer protocol, open to all and therefore not controlled by anyone. The monetary policy measures, the inflation rates and the famous image of the printing press are not applicable to Bitcoin.

21 million bitcoins, no more

If the quantity of gold on Earth is certainly finite, he is very good at being able to know it precisely. Opinions are already diverging as regards the total mass of gold extracted. For some, like the precious metals consulting firm Thomson Reuters GFMSthis figure would be 171,300 tonnes, an estimate which the Gold Standard Institute which gives the following range: between 1.2 and 2.5 million tonnes (source: Slate.fr).

With regard to fiduciary currencies, the number of dollars or euros in circulation is very variable as it is possible for commercial banks and state-owned banks to create ex-nihilo money.

For Bitcoin, it's very different since we already know from the first day, how many bitcoins will be in circulation when all bitcoins have been generated, namely 21 million. In 2140, there will no longer be new bitcoins that will be issued. Every four years or so, the number of bitcoins created in each block is halved. This phenomenon is called halving. 50 bitcoins were created every 10 minutes in 2009, 25 from 2013, 12.5 from 2016 and in May 2020 the figure will increase to 6.25 until reaching a total of 21 million by 2140.

But why have you limited the amount of bitcoins you ask? Simply to generate an asset that can have an intrinsic rarity, in the same way that precious metals such as gold have a value. Like the precious metal, bitcoins will be more and more difficult to extract.

What makes Bitcoin worth

We come to our main question, what makes the course of Bitcoin, gives it its value? It is simply determined by supply and demand. Here we find the good old concept of traditional markets. The higher the demand, the more the prices go up and vice versa. According to the site InvestopediaHowever, several factors may have an impact on the price of Bitcoin: the number of competing cryptocurrencies, the exchanges on which Bitcoin is traded, the regulations governing its sale or its internal governance.

High volatility that fades

Bitcoin is an asset that is still very volatile, but less so. Being an asset that is still very young, its market capitalization is very low compared to that of the fiat currencies. At the time of writing, its market capitalization is 150 billion USD. In comparison, according to the EDF, there was 1.70 trillion dollars in circulation as at January 31, 2019, ie 1.7 trillion USD or 1.7 trillion billion. Here is a visual illustration to better realize:

With such a low market capitalization, it is natural that speculative players with large amounts of bitcoins have a strong influence on the market and the price of Bitcoin. In the same way that a small boat placed on the ocean (Bitcoin) will rock a lot if the sea is unleashed, the liner (dollar) will not move for him almost no. But note that this volatility tends to decrease over the years. Just look at the following graph that shows the percentage of Bitcoin volatility since 2010 to realize that it is becoming weaker:

Follow the course of Bitcoin

To follow the course of Bitcoin, simply go to a site like CoinMarketCap to know the price of Bitcoin or use our price tracker in real time to know the price of the BTC on the various exchanges.

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