Understand Bitcoin Market Value: A Markets Perspective
In recent times, The Bitcoin price has been tracking sideways. I am often asked what drives Bitcoin market value? The trite answer is Supply and Demand.
In this video I step back and look at a market perspective for a currency – Australian Dollar compared to US Dollar. Supply and demand is shaped by the Central Bank (Reserve Bank of Australia). Transaction flows are split into TRADE flows (importing and exporting) and CAPITAL flows (net investment capital in and and and also flows in and out of capital markets – e.g., the stock exchange and the fixed interest markets). In some markets there is also a value called INTRINSIC value – e.g., Gold has intrinsic value as a store of wealth over and above its value as a useful commodity for industrial uses like jewelry, electronics and dentistry.
What has this all got to do with Bitcoin, you may well ask?
In the early days, Bitcoin miners were holding on to Bitcoin either because they had limited chances to exchange or they believed they had Intrinsic value. By design there are a limited number of Bitcoin available – we are in the linear growth part of the supply chart. When we look at transactions we are seeing increasing demand for Bitcoin (as measured by Bitcoin transactions). Unlike currency markets, which are huge, Bitcoin market is relatively small – prices are impacted by specific events and specific transactions (e.g., People’s Bank of China (PBOC) OK’s Bitcoin – UP; Mt Gox failure – DOWN; PBOC bans financial institutions cannot hold BTC – DOWN).
In summary, to understand Bitcoin market value:
Supply is flattening (by design)
Dependent on early miners/holders not dumping Bitcoin (as they believe in intrinsic value)
Growing transaction demand
Dependent on regulatory announcements (e.g., capital controls; taxation treatments; money laundering; criminality – Russia announcement; Silk Road)
Always important to remember that Bitcoin market is an unregulated market. Be aware of the risk of trading based on inside information