Now the price of bitcoin is $34,974. Two years ago it was ten times cheaper, and five or six years ago one could buy it for a few hundred euros, no matter how much its value varied and 11 years ago you could buy 1,250 of them for just one dollar. You might ask who knew that they should buy it then and wait for today… The answer is: Nobody.
Bitcoin was created on January 3, 2009 with the intention to become a digital currency that is not under control of banks, nor part of the financial system that only a few months before that caused the whole world countless problems that many needed a decade to recover. Created in response to harsh banking practices, many initially viewed it with disbelief and suspicion… Now they regret it.
Unlike currencies that are regulated by central banks as the official means of payment, the value of the digital currency bitcoin is not controlled by any institution, but by the relationship between supply and demand, i.e. the price that customers are willing to pay. Therefore, the market principle, i.e. the higher the demand – the higher the price – is the only that affects the change in value, given that the level of supply cannot increase ever.
There are countless reasons for the increase of the demand, as when it comes to anything else, the most common cause is the relocation of capital from anything that does not work reliably at a given time, which is especially clear in these times of global economic turmoil – crises and trade wars, due to which many give up trading currency pairs, gold, oil, etc.
Contrary to the monetary policy of countries that are focused on currencies and are subject to political and economic development, the ecosystem within which bitcoin operates is a fully decentralized monetary system in which no central government manages the monetary structure. Therefore, the exchange of bitcoin takes place in accordance with precise rules and according to a strict protocol. This process takes place on a blockchain network, and all transactions on it are intangible and encrypted.
The reason for the price change
The price of bitcoin varies because, compared to other cryptocurrencies, it includes the largest volume of transactions, but its market is still relatively small compared to the markets of currencies or commodities and the value is exposed to greater fluctuations. When it comes to supply, it is limited to the initially issued 21 million units, which is why demand follows its deflationary movement in order to maintain price stability.
In addition to this, the level of demand is also affected by events that improve or damage its reputation. For example, during the first wave of its more intense growth, when its value increased from $50 to $250 in a few months and exceeded $1,000 six months later, some of the world’s largest banks spoke of it as a “bubble,” a risky phenomenon, saying that all those who invest will soon regret it. Meanwhile, electronic money such as Onecoin has emerged, which was one of the biggest scams when it comes to digital money because it was based on a pyramid scheme, but its promoters identified it with bitcoin, confusing the audience and causing the loss of value, due to the luck of trust.
However, when technology companies began testing the application of the blockchain platform, on which bitcoins run, within their services, they began to offer the possibility of paying this type, and the same banks that initially criticized this phenomenon enabled its exchange for physical money in both direction, there was a return of confidence, which raised its value above the new psychologically significant goal of $10,000. In the meantime, the oscillations continued in accordance with a series of market and political-economic events, where the largest role was played by the relations between the USA and China, including all political decisions that change the course of their economic cooperation.
Old users, new users…
In times of crisis, it has become most noticeable how much the value is actually conditioned by the perception of investors: someone will buy bitcoin, so he or she believes that the price will rise in the near or distant future. The reasons for the fall in prices range from failure to use technology designed to be the part of this process, through political pressures to regulate it, as part of the agenda of some governments, to the spread of misinformation placed by many media and public figures in the last decade. Decisions of governments, cities and other public entities do not have to be repressive, they may also stimulate bitcoin payments through infrastructure improvements or tax-free transactions. For example, if you enable bitcoin payments on a certain destination, the news spreads as very interesting, achieving two goals – a good way of promotion and attracting investors. Some will use bitcoin to buy museum tickets, others will start a business in an environment as such.
Unlike the trend that was common when bitcoin has just been created, the majority of today’s owners are not only enthusiasts who buy it to pay for a video game, students and, in general, the younger population of lower purchasing power, as it is now owned also by wealthy investors who have the opportunity to spend money in this way. An example that might illustrate former spirit of buying bitcoin, that shows how much everything has changed so far is the event in May 2010 when one owner of a larger quantity of bitcoin decided to order two pizzas in a restaurant in Florida that offered charging in this digital currency. Bitcoin was so cheap at the time that he paid the $25 bill, with 10,000 digital coins, whose dollar equivalent then totaled $41, giving the “tip”.
One may wonder how much the wealth of those who then bought about 400 bitcoins for one dollar was worth today. If there are still such examples then they are extremely rare, because the only thing that could make you wouldn’t decide to sell your coins for so long is to forget the password or have the device on which you installed your e-wallet unavailable for so long and functional all the time. Many sold it when the price rose from $250 to $1,000 in less than a year, convinced that they had made a perfect decision, as it seemed so. The previous year has shown how dynamically the price of this cryptocurrency can rise in situations when people around the world are losing confidence in other market assets where the value collapsed quickly due to the pandemic. First, the consequences of the crisis were very visible, and then trust was renewed, especially in the last quarter of 2020.
Impact of the COVID-19 crisis
After reaching the $19,000 threshold in 2017, the global climate was not particularly favorable to investing in bitcoin, because after the last recovery of almost all major markets from the effects of the global economic crisis at the end of the first decade of this century, the world finally turned to more relaxed spending. The previous year completely reversed the perception of spending and savings, so the world went back to bitcoin again.
More dynamic value growth began in October 2020 when online payment service PayPal announced it would integrate bitcoin and other cryptocurrencies so that they could be used in transactions, first in the US and then in the European market this year. It is a company with more than 360 million users worldwide, who will have the opportunity to have cryptocurrencies in their PayPal e-wallets. This has greatly helped the public to become familiar with the characteristics and role of bitcoin, as PayPal’s announcement actually illustrated how bitcoin is used to pay, not just to make money on the value change.
On the other hand, when they realized that it would be necessary to address the economic consequences of the pandemic, the European Central Bank, the Bank of England and the Federal Reserve began a new phase of expansionary policy that pushed very low interest rates to even lower or they even became negative. This meant that investors would have to discover that part of the usual investment activities would not only be unprofitable, but create an additional cost, which made it necessary to move capital to what would at least temporarily keep its value.
The best is yet to come
All this is just the beginning of a significant interest in bitcoin from the general public, as traditional investors will only start moving their capital into this area in the way they used to reallocate it in gold. After the expansionary policy of central banks was added to the effect created by PayPal in this market, any possibility of returning to the traditional market of government bonds or fixed income assets was literally erased.
In other words, the entry of such investors into bitcoin trading has enabled it to be not only a way to make money on the price difference, but also an instrument for medium or long-term storage of value. The policies of the leading central banks to be implemented this year will make the currencies they manage worth less in order to stimulate exports. In such conditions, anyone who has more capital does not want to keep it in one of the currencies whose value will fall, therefore they relocate it to a safe haven, as gold used to be, in something that will bring additional earning opportunities.
The question that arises is what would happen if all the capital that turns into bitcoin today was abruptly withdrawn towards some other forms of investment. The probability of such a thing happening is extremely small, because this is the trend that guarantees the growth of the price of bitcoin. Not only will that growth sometimes be slowed down, but it will not be constant either. However, that will not eliminate the possibility of continued growth. Funds drawn from such roles in any existing option could not be regenerated so quickly, which is why such intentions would be lacking, as such moves would be unprofitable until a new fintech revolution occurs in the market, and this has only just begun.