What drives bitcoin’s price?

About bitcoin’s upward price trend

Only 4 in 10 respondents of the Crypto Literacy Survey correctly answered the question about what drives bitcoin price. The most straightforward way to think about why bitcoin’s price keeps climbing higher and higher is because of the basics of supply and demand.

Bitcoin’s supply

In a separate post, we covered how bitcoin’s capped supply of 21 million and its set issuance schedule through 2140 work. One of the greatest attributes of bitcoin, from an economics perspective, is that the supply side is hard-coded into the bitcoin protocol and already set. This might be the first time in history where the rules and issuance of a monetary system are completely capped, clearly defined, and well-known in advance.

Data Insight Chart

Another thing to consider, supply-wise, is that bitcoin’s market is global. Unlike other forms of currency or equities markets that are bound by constraints like geography and time zone, bitcoin is available everywhere and the bitcoin market never closes, meaning the bitcoin supply is always available.

Bitcoin demand

The demand for bitcoin continues to grow globally. According to a study about cryptocurrency usage in Africa, demand for digital currencies including bitcoin grew 1,200 percent from June 2020 to June 2021 —  and that was mainly retailer investors. Elsewhere, including in the U.S. institutional investors like pension funds and endowments are buying bitcoin to have as part of a portfolio. The list goes on, from CEOs adding bitcoin to corporate balance sheets to professional athletes wanting to get paid in bitcoin, the demand seems to be growing from all sides.

But one interesting aspect of the bitcoin demand story is that increasingly investors are buying and holding (or hodling in crypto lingo) their stack of bitcoin long term. Figures vary, but roughly 50 percent of the bitcoin supply that is held in wallet hasn’t moved in a year or more.  The long-term holding strategy only puts more pressure on the supply side, which drives the price up overtime, which makes long term holding more attractive, which drives demand and starts the entire cycle over again.

So, while bitcoin and crypto might feel complex from a technology standpoint, the basic laws governing its upward price action are pretty straightforward. Bitcoin has a constraint supply and demand for that supply continues to grow. On top of that, people buying bitcoin are holding it long term (because the price keeps going up), which only squeezes the supply more.

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