Will bitcoin go 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 Does the Price of Bitcoin Keep Going Up?

Breaking down the reasons that Bitcoin’s price keeps rising

As of December 16, Bitcoin has increased by about 195% year-to-date, topping $23,000, but what is driving this meteoric rise? The reasons for its appreciation vary, but Bitcoin has grown from what was once considered a scam by many into something that has matured into a viable investment made by famous billionaire investors, large institutions, and retail investors alike. Why are these investors so bullish on Bitcoin even after it has surpassed all-time highs?

Key Takeaways

• Inflation and the lowering purchasing power amidst massive stimulus spending is driving people to store-of-value assets, including Bitcoin.
• Bitcoin’s mining reward halving mechanism further proves its scarcity and merit as a store-of-value asset.
• Institutional adoption as both an investment and as a service they can provide shows strong confidence in the future of Bitcoin and cryptocurrency.
• The infrastructure built around cryptocurrency and Bitcoin has shown immense maturity over recent years making it easier and far safer to invest than ever before.

Inflation and the Lowering Purchasing Power of the Dollar

Since the gold standard was removed in 1971 by Richard Nixon the amount of circulating dollars has steadily increased. Between the year 1975 and just before the coronavirus hit, the total money supply has increased from $273.4 billion to over $4 trillion as of March 9, 2020. Since that date, the total money supply has gone from $4 trillion to over $6.5 trillion as of November 30, 2020, largely due to coronavirus related stimulus bills.

Congress is currently in talks to pass another stimulus bill of nearly $1 trillion, aimed to help those suffering from the coronavirus. Should this new stimulus bill be passed it would mean that since the onset of coronavirus, around 50% of the world’s total supply of US dollars will have been printed in 2020.

While there are certainly people suffering from a lack of jobs and businesses shutting down, the increase in money supply has significant long-term implications for the purchasing power of the dollar.

The stimulus spending has led many to fear far greater inflation rates, and rightfully so. To hedge against this inflation investors have sought assets that either maintain value or appreciate in value. Over the course of 2020, this search for a store-of-value asset to hedge against inflation has brought them to Bitcoin. Why?

There are many assets that are considered a store-of-value. Perhaps the most common assets that come to mind are precious metals like gold or other things that have a limited supply. With gold, we know that it is a scarce resource, but we cannot verify with complete certainty how much exists. And, while it may seem far fetched, gold exists outside of earth and may one day be obtainable via asteroid mining as technology advances.

Why this Matters to Bitcoin

This is where Bitcoin differentiates itself. It is written into Bitcoin’s code how many will ever exist. We can verify with certainty how many exist now and how many will exist in the future. This makes Bitcoin the only asset on the planet that we can prove has a finite and fixed supply.

In Investopedia’s Express podcast with editor-in-chief Caleb Silver, Michael Sonnenshein, a board member of the Grayscale Bitcoin Trust, said: “The amount of fiscal stimulus that has been injected into the system in the wake of the COVID pandemic to stimulate the economy and get things moving again, I think has really caused investors to think about what constitutes a store of value, what constitutes an inflation hedge and how they should protect their portfolios.”

Sonnenshein elaborated further saying: “It’s important that investors think about that. And I think a lot of them are actually thinking about the juxtaposition between digital currencies, like Bitcoin, which have verifiable scarcity and thinking about that in the context of Fiat currencies, like the US dollar which seemingly are being printed unlimitedly.”

Part of Bitcoin’s price appreciation can certainly be attributed to fears of inflation and its use as a hedge against it. With further money printing on the horizon from stimulus packages, as well as talks of student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store-of-value assets more compelling.

The Halving

To further understand why Bitcoin has a verifiable finite limit to its quantity it is important to understand the mechanism built into its code known as the Halving. Every 210,000 blocks that are mined, or about every four years, the reward given to miners for processing Bitcoin transactions is reduced in half.

In other words, built into Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation. The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are 18.5 million Bitcoins in circulation, or about 88.4% of Bitcoin’s total supply. Why is this important?

As discussed before, the rising inflation and growing quantity of the US dollar lower its value over time. With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its rate of inflation relatively consistent.

With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.

Since Bitcoin’s inception, its price has followed extremely close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has absolutely crushed its previous all-time high.

The first halving, which occurred in November of 2012, saw an increase from about $12 to nearly $1,150 within a year. The second Bitcoin halving occurred in July of 2016. The price at that halving was about $650 and by December 17th, 2017, Bitcoin’s price had soared to just under $20,000. The price then fell over the course of a year from this peak down to around $3,200, a price nearly 400% higher than Its pre-halving price. Bitcoin’s third having just occurred on May 11th, 2020 and its price has since increased by nearly 120%.

Bitcoin’s price increase can also be attributed to its stock-to-flow ratio and deflation. Should Bitcoin continue on this trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future. Theoretically, this price could rise to at least $100,000 sometime in 2021 based on the stock-to-flow model shown above.

Some investment firms have made Bitcoin price predictions based on these fundamental analysis and scarcity models. In a leaked CitiFX Technicals analysis Tom Fitzpatrick, the managing director at US Citibank, called for a $318,000 Bitcoin sometime in 2021. Live on Bloomberg Scott Minerd, the Chief Investment Officer of Guggenheim Global called for a $400,000 Bitcoin based on their “fundamental work.”

Institutional Adoption

As discussed, the narrative of Bitcoin as a store of value has increased substantially in 2020, but not just with retail investors. A number of institutions, both public and private, have been accumulating Bitcoin instead of holding cash in their treasuries.

Recent investors include Square (SQ), MicroStrategy (MSTR), and most recently the insurance giant MassMutual, among many others. In total, 938,098 Bitcoin now valued at the time of writing at $19,450,247,760 has been purchased by companies, most of which has been accumulated this year. The largest accumulator has been from Grayscale’s Bitcoin Trust which now holds 546,544 Bitcoin.

Investments of this magnitude suggest strong confidence among these institutional investors that the asset will be a good hedge against inflation as well as provide solid price appreciation over time.

Aside from companies flat out buying Bitcoin, many companies are now beginning to provide services for them. PayPal (PYPL), for example, has decided to allow crypto access to its over 360 million active users. Fidelity Digital Assets, which launched back in October 2018, has provided custodial services for cryptocurrencies for some time, but they are now allowing clients to pledge bitcoin as collateral in a transaction. The CBOE and the CME Group (CME) plan to launch cryptocurrency products next year. The number of banks, broker-dealers, and other institutions looking to add such products are too many to name, but in the same way that a company must have confidence in an investment, it must also have confidence that the products that they sell have value.

Central banks and governments around the world are also now considering the potential of a central bank digital currency (CBDC). While these are not cryptocurrencies as they are not decentralized, and core control over supply and rules is in the hands of the banks or governments, they still show the government’s recognition of the necessity for a more advanced payment system than paper cash provides. This further lends merit to the concept of cryptocurrencies and their convenience in general.

Maturity

From its initial primary use as a method to purchase drugs online to a new monetary medium that provides provable scarcity and ultimate transparency with its immutable ledger, Bitcoin has come a long way since its release in 2009. Even after the realization that Bitcoin and its blockchain tech could be used for way more than just the silk road, it was still near impossible for the average person to get involved in previous years. Wallets, keys, exchanges, the on-ramp was confusing and complicated.

Today, access is easier than ever. Licensed and regulated exchanges that are easy to use are abundant in the US. Custodial services from legacy financial institutions that people are used to are available for the less tech-savvy. Derivatives and blockchain-related ETFs allow those interested in investing but fearful of volatility to become involved. The number of places that Bitcoin and other cryptocurrencies are accepted as payment is growing rapidly.

In Investopedia’s Express podcast, Grayscale’s Sonnenshein said “the market today has just developed so much more from where we were back then (2017 peak), we’ve really seen the development of a two-sided market derivatives options, lending and borrowing futures markets. It’s just a much more robust 24 hour two-sided market that is starting to act more and more mature with every day that passes.”

Along with all of this, the confidence showcased by large institutional players by both their offering of crypto-related products as well as blatant investment into Bitcoin speaks volumes. 99Bitcoins, a site that tallies the number of times an article has declared Bitcoin as dead, now tallies Bitcoin at 386 deaths, with its most recent death being November 18th, 2020 and the oldest death being October 15th, 2010. With Bitcoin smashing through its all-time-high and having more infrastructure and institutional investment than ever, it doesn’t seem to be going anywhere.

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