Supply and Demand, How the price of Bitcoin moves

Categories: Educational articles | Published by: Dimitar Dimitrov

24/09/2019

Markets and Human Behavior

Supply and Demand – Why this ratio is very important. Do you want to know how the price of Bitcoin and other cryptocurrencies moves and why? Have you ever wondered about this subject? If the answer to those two questions is yes, this may be the article for you. Many people fail to realize how simple actually it is as a whole. The complicated part comes when we dive deeper into the activity of a market and its psychology. As markets are driven by humans, their behavior and the decisions of the majority can be connected to human psychology.

Understanding how supply/demand is very important as this will give you a better understanding of how markets work. You also need to understand cycles, as every market moves in cycles. Remember that Bitcoin is still in its early days and as everything that is just emerging we are bound to have high volatility. The market around cryptocurrencies is one of the most recent examples of very high volatility.

Why Bitcoin is so volatile?

There is one important aspect that makes a market so young, so volatile. It is the fact the Bitcoin is a limited asset and this is built in the protocol with only 21 million to ever exist. This amplifies the effects making it a pure example. This is why you need to understand cycles and as I said Bitcoin is the purest example of that. We have an article that is based purely on the 4-year Bitcoin cycle that you can read here. There is also a halving event which is also built-in into the code. Where you have the reward of Bitcoin halved every 4 years. Therefore you have fewer and fewer Bitcoins going into circulation that are created from mining.

Consider all of that and that we are still in the very beginning and you get the perfect recipe for very high volatility.

To gain a broader view of the situation you need to understand what is market capitalization compared to traditional assets. Let’s compare the tiny market cap of Bitcoin to that of Gold. The one asset that it is mostly compared to.

Bitcoin Market Cap: 150 Billion
Gold Market Cap: around 7-8 Trillion

Even a 10x gain on the price of Bitcoin will still be far from enough to be even near to the market cap of Gold.

Supply and Demand

It is very important to understand this basic theory of supply and demand. We will explain simply this theory, making it easy to comprehend for the crypto market. As we mentioned earlier Bitcoin is limited and that it will ever have 21 million ever created (total supply) with a circulating supply of almost 18 million at this moment. Therefore this is making Bitcoin one of the most scarce assets on the planet, altogether with the biggest potential ever.

Demand

Now let’s get over to the demand. Demand is decided by the market, by the people. If you have a lot of people going to exchanges like Coinbase, CEX, Bitpanda to buy Bitcoin and the buyer’s demand is more than the seller demand the price will go up, especially on a limited asset like Bitcoin. And the price will fall if there are more Bitcoins for sale than people wanting to buy.

Supply

Next comes the supply which is very important. This is the magic pill for the volatility that we witness now, in the beginning. But this is also a magic pill for stability in the future. Having a limited supply and first time ever knowing exactly how much will ever be in existence is a very important characteristic. We have a rising demand for a limited supply, therefore what we should expect is the price to rise in the long term.

This is a very simple ratio as the more people want to get hold of Bitcoin – which has a limited supply will take its price higher. Of course, this is only one of the factors in how a market works.

Here is a link to a model that will help you see exactly what we are trying to explain for the demand/supply.

Psychology of the market

market psychology — **Market Psychology**

What plays a significant role in the price movement is the sentiment. How people feel towards an asset will most likely determine its price movement in a short period of time. Just like we see from the “Cheat Sheet” the market has its seasons.

In the beginning, you will always find people disbelieving, just like we saw many people dismissing Bitcoin as they just didn’t believe that it will work. But things gradually change and you can see that on the chart which leads people sentiment gradually to Euphoria. Which we saw in 2017 with the FOMO from people flocking to exchanges to buy Bitcoin. Of course, after demand so big it, after a hype cycle we always see big corrections. This is bound to happen when the prices get overboard, ahead from the actual development/adoption.

After this, you see how the sentiment starts to gradually change after its peak. From positive full with thrill to anger and depression.

What we see here will repeat until Bitcoin is adopted on a larger scale. Until then we will have those FOMO periods leading to the creation of small bubbles like the one in 2017.

What is the conclusion?

That there we will most likely see another big hype cycle where the prices will go to unbelievable highs. We are on the right track for now with an expected time frame for this to happen in 2021-2022. Bitcoin is very limited, don’t forget that!