Bitcoin price going down

Why is Bitcoin Going Down / Up? What Determines Price?

By: Ofir Beigel | Last updated: 1/11/21

Bitcoin’s price is probably the most commonly searched aspect of the digital currency. This post explains how the price is determined and what makes it go up or down.

Why is Bitcoin Going Down / Up Summary

Bitcoin’s price is defined by the last trade conducted on a specific exchange. Price goes up when buying pressure increases, and goes down when selling pressure increases. There are several major factors that can cause the price to go up or down such as:

• Media hype / FUD
• Loss of trust in fiat currencies
• Institutional adoption
• Supply shortage
• Dumping of coins on the market

That’s what affects Bitcoin’s price in a nutshell. For a more detailed explanation keep on reading, here’s what I’ll cover:

1. What is Bitcoin’s Price?

When talking about Bitcoin’s price, people are usually referring to either the USD price on a leading exchange (such as Bitfinex, Binance, or Bitstamp) or a composite price made from the average of multiple exchanges’ prices (e.g. CoinGecko).

When people talk about the price on a certain exchange, they mean the price of the last transaction made on that specific exchange.

So for example, if the price of Bitcoin on Bitstamp is $10,000, this means that the last trade made on Bitstamp was closed at $10,000. Once a new trade is conducted, the price will be updated accordingly.

As Bitcoin is a decentralized asset that trades on many exchanges and between countless individuals around the world, there is, in fact, no singular Bitcoin price.

Each exchange has its own price for Bitcoin, although these prices are usually quite similar. This opens the door to arbitrage opportunities for experienced traders with enough capital (explained below).

Price Index

As there’s no official Bitcoin price, certain sites and companies make a composite index price available. This price is calculated by weighting the prices of various leading currencies by volume and combining them as an average.

For example, the Coindesk Bitcoin price index represents an average of bitcoin prices across leading global exchanges that meet certain criteria.

These indexes can be useful pricing mechanisms because they smooth out the effect of any unusual trading activity on a single exchange.

For example, say a large trader decides to sell 25,000 BTC on Bitfinex. The price will be greatly suppressed on that exchange and take some time to recover back to the international average price. An index price will show less of this localized disturbance over its duration.

2. What Determines Bitcoin’s Price?

Price discovery describes the process by which buyers and sellers meet on a crypto exchange to reach agreement on the price at which they’ll trade.

Buyers want to pay as little as possible for their Bitcoin. Sellers want to sell Bitcoin for as much as possible. Both must compromise upon a certain price before any trading can occur.

As I’ve mentioned before, the current price of Bitcoin, on any exchange, is simply the most recent price a buyer and seller have agreed to.

Let’s take a closer look at how buyers and sellers on a crypto exchange reach an agreement.

The Order Book

The trading interface on any standard crypto exchange features what’s known as the “order book.” It’s not a real book of course—rather the display page for market information that relates to the execution of buy and sell orders.

On the buy side of the book are listed all the standing offers to buy Bitcoin at a certain price—also known as “bids.” On the sell side are all the offers to sell Bitcoin at a certain price—also known as “asks.”

Recent trades are often displayed too, in a list and/or chart format.

Here’s an example of BitStamp’s real-time order book, as displayed via the interface of BitcoinWisdom.com:

Asks are listed at the top right; showing the price the sellers want for their coin and the number of coins they are willing to sell.

Additional asks are present in Bitstamp’s order book, but only a dozen or so asks that are closest to the last price are visible here. Below are the closest bids, showing the price and number of coins the buyers want.

At the bottom is the trade history, which shows how many coins were traded and at what price. The most recent trade will be the one that set the last price.

This last price reflects the current valuation of Bitcoin on the exchange—in other words, the current Bitcoin price. It will change only as further trading occurs.

Makers and Takers

Bitcoin’s price movements are often explained away as more buyers than sellers, or vice versa. In practice, this isn’t really true since it always takes two parties to trade (if someone bought Bitcoin, someone else sold it).

What really drives the price up or down is the side that’s more aggressive in “crossing the spread.” The spread is simply the difference between the best bid and the best ask price.

In our Bitstamp example, the best bid (i.e. buying price) is $9,350, and the best ask (i.e. selling price) is $9,400, so the spread is $50.

Whichever side is more motivated to trade will pay the $50 spread cost in order to execute the trade immediately. This side is known as “the taker,” as it’s taking the offer listed in the order book by “the maker” (the person who created the trade).

Let’s say that multiple buyers, convinced that price will hit $10,000 by Friday, are acting as takers.

Buyers believe they’ll profit by buying below $10,000. This makes them more likely to pay the spread to buy up all the coins on offer at $9,400—they expect to make $600 minus the $50 spread.

Once buyers have absorbed all the coins offered at $9,400, the next best ask then becomes coins offered at $9,450—and after that, coins offered at $9,500, and so on, up the ask list.

If buying is aggressive, sellers soon realize it and start raising the prices of their asks. This continues until buying pressure is exhausted, at which point the process will reverse. Over time, these impulses drive the price up or down.

This process happens across all Bitcoin exchanges. What keeps prices more or less synchronized across exchanges is the process of Bitcoin arbitrage, the trading strategy that takes advantage of the price differences between trading venues.

For example, if Bitcoin is cheap on Bitstamp but expensive on Coinbase, then traders will buy on Bitstamp and sell on Coinbase. The effects of arbitrage are what keep prices aligned across exchanges.

Leading Exchanges

Finally, it’s worth noting the effect of market-leading exchanges. Those with the highest volumes (i.e. the highest number of coins traded) tend to be considered as having the more “official” price.

For example, if Bitcoin’s price spikes on a major exchange such as Bitfinex, Binance, or Bitstamp and especially across several major exchanges at once, then it will almost certainly lead all other global exchanges to have higher prices too.

The reason for this leading exchange(s) phenomenon is simply that most traders pay close attention to major exchange prices.

Traders have the expectation that prices on major exchanges will filter through to minor exchanges due to the effect of arbitrage effects and the belief that other traders will act accordingly.

This leading exchange effect occurs even across exchanges that use different currencies.

For example, if Bitcoin that’s being traded in a high-volume country such as Japan, where it’s priced in JPY, starts dipping below the average international price, that’s likely to act as a drag on prices in USD, EUR, and other markets too.

3. Why is Bitcoin Going Down?

Now that you understand what Bitcoin’s price is and how it’s determined, let’s go over some events that can make Bitcoin’s price plummet.

Price Near All-Time High

Often when Bitcoin’s price reaches a point near a recent all-time high, price resistance is met and the price fails to cross the previous high.

This is attributed to the fact that many traders place sell orders near historical all-time highs. Therefore, when the price reaches these points, a selling pressure is felt that brings the price down.

Media FUD

FUD stands for Fear, Uncertainty, and Doubt. Media FUD happens from time to time when Bitcoin receives very negative press. Here are some examples of how Bitcoin has been declared dead over 380 times throughout the years.

This type of media FUD can cause mass panic and increase the selling pressure as people lose faith in Bitcoin.

Keep in mind that more often than not the media is looking to make headlines and generate interest rather than conduct extensive detailed research. So don’t rush to sell the moment you hear Bitcoin is dead yet again.

Dumping Coins on the Market

As a general rule, whenever a large amount of Bitcoins is being sold on the market, it will drag Bitcoin’s price down since the sell pressure increases.

For example, in certain cases, the FBI or different authorities seize substantial amounts of Bitcoin from illegal operations. When this happens, they usually auction off these Bitcoins to the public.

Since authorities aren’t geared towards maximizing profit and a usually large amount of Bitcoin are being auctioned, they are normally sold below the market price.

This, in turn, causes Bitcoin’s price to drop, as the auction winner usually sells some of his newly acquired coins on exchanges as well.

4. Why is Bitcoin Going Up?

There are also certain events that increase buy pressure and make Bitcoin’s price go up. Let’s go over some examples.

Crossing an ATH

If Bitcoin’s price crosses a certain all time high, in many cases this generates positive buying momentum which increases the price even more.

Having said that, when extreme buying momentum occurs it’s highly likely a sharp drop in price will soon follow (also known as a correction). If you’re taking advantage of a buying momentum, keep this in mind and consider taking some money off the table before this happens.

Media Coverage / Hype

The same way media FUD can generate panic and selling pressure, media hype can generate increased buying pressure.

This was evident in 2017’s great Bitcoin rally when the price neared $20,000. Every other day Bitcoin was covered in the news, generating increased adoption, interest and mainly speculation from the masses.

The saying “buy the rumor, sell the news” implies that whenever the media coverage kicks in, it’s time to be wary about the price since a correction may soon come. So while initially, media coverage drives up the price, it can also cause it to crash if it rallies too fast.

Loss of Trust in Fiat

One of the major drivers behind Bitcoin’s price surge throughout the years was loss of trust in traditional fiat currencies (USD, EUR, GBP, etc.).

When people lose trust in their own currency (e.g. inflation) or banking system they look for an alternative to store value that isn’t controlled by any government or bank. Usually, Bitcoin, among other assets such as gold, is a popular solution.

Adoption

When a major retailer or financial institution starts accepting Bitcoin, it usually signals the market that Bitcoin is becoming more mainstream. This may cause the price to rise due to speculation of future mass adoption.

Another major price driver is said to be the approval of Bitcoin financial instruments such as Bitcoin ETFs and Bitcoin futures. These financial instruments allow big institutions such as banks, hedge funds, etc. to invest in Bitcoin without actually buying the currency.

Some believe that if major market players consider Bitcoin a legitimate investment, it’s only a matter of time until the general public starts investing in it as well, increasing the buying pressure.

Supply Shortage

Another main driver behind increased buying pressure is shortage in supply. Bitcoin’s supply is capped at 21 million. As of today, over 88% of this amount has already been mined.

Today, every 10 minutes on average, another 6.25 Bitcoins come into existence, however, this amount is halved every 4 years or so.

Some believe that Bitcoin’s halving event will drive up Bitcoin’s price as a shortage in supply of new Bitcoins will occur. The next halving event is scheduled for around May 2024.

5. Frequently Asked Questions

Why Does Bitcoin’s Price Fluctuate?

Bitcoin’s price is extremely volatile. It’s not uncommon to see price movements of 5% or even 10% in a single day. The reason for these fluctuations is that Bitcoin’s market cap is still relatively small.

The market cap = Number of Bitcoins in circulation * Price per Bitcoin.

Usually, the smaller market cap an asset has, the more volatile it will be. Imagine throwing a rock into a small pond. Now take the same rock and throw it into the ocean. The rock will have much more effect on the pond than on the ocean.

In the same manner Bitcoin (the small pond for now) is more volatile (i.e. affected) by everyday buy / sell orders (the rock). When Bitcoin’s price increases, so will the market cap and the price movement will gradually decrease.

6. Conclusion

Bitcoin’s price will probably continue to fluctuate until mainstream adoption will arrive. For now, big buy or sell orders by Bitcoin whales disrupt the market as the market cap isn’t big enough to withstand them.

The current unstable worldwide financial system may prove to be the final push Bitcoin needs to skyrocket, however, it’s anybody’s guess if indeed that scenario will play out.

What are your thoughts about Bitcoin’s price? Will it skyrocket, plummet or just stay the same? Let me know your thoughts in the comment section below.

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Why Is Bitcoin Going Up, and Will It Crash Soon? What’s Next as Price Doubles to $40K

Bradley Keoun

Muyao Shen

Why Is Bitcoin Going Up, and Will It Crash Soon? What’s Next as Price Doubles to $40K

Bitcoin’s prices reached an all-time high of above $40,000 less than a month after breaking $20,000 for the first time. Since the start of the most recent rally, ostensibly begun in October, its value has increased fourfold.

So for pros and newbies alike, or if you want to be the cryptocurrency expert at your next Zoom party, it’s natural to ask: Why are prices going up, and will bitcoin crash?

Bitcoin was invented just 12 years ago as a new type of electronic payment system, built atop an Internet-based computing network that no single person, company or government could control. The reality is the bitcoin cryptocurrency’s trading history is so short, with methods for valuing the asset still largely untested, that nobody really knows for sure what it should be worth now or in the future.

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That hasn’t stopped digital-asset investors or even Wall Street analysts from putting out price forecasts ranging from $50,000 to $400,000 or beyond.

Based on CoinDesk’s reporting, here are a few key reasons why bitcoin prices have recently rallied:

• Demand from institutional buyers, many of them eyeing bitcoin as a hedge against inflation. The cryptocurrency is seen as a hedge against inflation because, under the network’s original programming, only 21 million bitcoins can ever be created; so there’s a contrast with central banks like the Federal Reserve that can decide based on a committee vote to print more money. Big asset managers including Tudor Investment and Guggenheim Partners have announced bitcoin purchases or wagered on prices using futures contracts on the Chicago-based CME exchange. Even old-line Wall Street firms such as Morgan Stanley have weighed in with bullish pronouncements. Analysts at JPMorgan Chase, the biggest U.S. bank, recently predicted a price of $146,000 over the long term.
• The U.S. dollar’s decline in foreign exchange markets. The U.S. Dollar Index, a gauge of the dollar’s value against major world currencies like the euro and Japanese yen, slid 6.8% in 2020 and is down again in 2021. That’s key for bitcoin because the cryptocurrency’s price is mostly denominated in U.S. dollars. Possible reasons for the greenback’s decline include the Federal Reserve’s $3 trillion-plus of money printing over the past year, which is roughly three-quarters of the entire amount previously created in the U.S. central bank’s 108-year history. Images of protestors storming the U.S. Capitol on Wednesday probably didn’t burnish America’s leadership role on the global stage, and now many economists are predicting that big spending plans under a Democratic-controlled government would lead to new stimulus bills and potentially outsize government budget deficits for years to come. Much of those extra costs could be financed through additional Fed money printing.
• Retail purchases. Many individuals are speculating on bitcoin prices, and it’s become increasingly easy to buy bitcoin, with big services like PayPal enabling purchases last year. Analysts for the digital-asset firm ByteTree noted this week that blockchain data appear to show a high concentration of bitcoin purchases in the amount of $600 — the same amount as the American stimulus checks sent out in the latest U.S. coronavirus emergency aid package.

All this may have led to a tremendous rally over the past few months. But could bitcoin prices crash? Of course they could, several analysts told CoinDesk.

The cryptocurrency’s price is notoriously volatile, and substantial and unexpected price swings aren’t uncommon. Below is a sampling of comments from cryptocurrency analysts and other financial experts on how a pullback might look, and what might cause it.

• Bitcoin “has been and remains extremely volatile,” said Joe DiPasquale, CEO, BitBull Capital, a cryptocurrency-focused hedge fund. As recently as Monday, he noted, after prices had climbed to a new all-time high, they tumbled almost $7,000. “What causes this is that people can use lots of leverage, so they can easily get washed out.” He sees a correction as possible, though there appear to be plenty of interested buyers around $28,000, so that level might function like a price support.
• There hasn’t been a single year since 2013 when prices have not fallen at least 25% from a high point reached earlier in that year, said Gavin Smith, CEO of the digital-asset firm Panxora. He said he wouldn’t be surprised to see bitcoin prices rise to $70,000 or $80,000, nor a setback of 40%. Medium term, he’s bullish: “Over a three-year period, this is a great asset.” But over the long term, there’s a risk that technological developments could overtake bitcoin. “Even with quantum computing, there’s nothing on the horizon that indicates that could happen,” he says, “but it’s always dangerous to completely ignore the risk.”
• Bitcoin prices could rally two to three times from their current level before falling back to about where they are now, said Mike Venuto, co-portfolio manager of the Amplify Transformational Data Sharing exchange-traded fund, which invests in blockchain-related stocks. That would imply a retracement of more than two-thirds from that hypothetically new all-time high. “What’ll cause a crash more likely is overexuberance on the upside. I don’t think we’re there yet.”
• “There will be swings, and yes, the swings will be wild,” said Denis Vinokourov, head of research for the cryptocurrency prime broker Bequant. “You have a lot of retail flow that tends to panic.” He sees prices going up in the long term, at least partly based on the bullish expectations of big Wall Street firms. “Can it go to $4,000? Yes.” One potential trigger for a rapid sell-off could be any actions brought by authorities against the company behind tether (USDT), a privately issued, dollar-linked digital token known as a “stablecoin” that has become a key source of liquidity in digital-asset markets. New York State prosecutors are currently battling Tether in court due to its finances.
• “The history of financial markets is the history of bubbles,» said James Angel, Georgetown University finance professor. He notes that authorities could move to crimp the bitcoin rally if they start to get worried that it’s becoming a threat. “Almost everybody who tries to start their own money does so in competition with a national currency, and it usually gets shoved aside by regulators.”
• «While we’re currently seeing an unequivocal expression in the market’s bullish sentiment, a correction could well be on the horizon,» said Sui Chung, CEO of CF Benchmarks, a cryptocurrency provider. «This is a natural part of market mechanics. While it may dampen near-term enthusiasm, it will ensure future price rises remain grounded.»
• “There is likely to be profit taking along the way, causing temporary dips,» said Guy Hirsch, managing director for the U.S. at the trading platform eToro. «But given the extraordinary amounts of adoption by institutions, it would be a surprise if bitcoin dropped below $20,000 any time soon.”

So for the Zoom party, you can tell them: Yes, according to the experts, a crash is probably coming but that’s typical for bitcoin, and if history is any guide, prices will probably recover.

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