The price of Bitcoin! Is it crashing to zero or is it going to the moon? Nobody really knows. And while it's important, the most important thing - whether you're just starting out, your just now learning about Bitcoin, or you've been in Bitcoin for years - is to understand how the price of Bitcoin is determined, and that's what we're talking about today. And no, it isn't just Elon Musk sitting on his phone tweeting about the price of Bitcoin. Maybe it's a little bit of that, but we're going to get into a lot more detail and more of the fundamental things that drive the price of Bitcoin. So stick around and let's get into it.
Welcome back to the channel. I'm Brian Logan. I am so thankful that you are here!
We're going to cover some economic topics in this video. Don't worry, it's not complicated, but I'm not an economics professor nor a financial professional, so be sure to do your own research. I'm going to put links in the description below for my sources, but do your own research before investing or doing anything related to Bitcoin or stocks.
So now that that's out of the way, let's get into Bitcoin price. There are three major things that influence the price of Bitcoin. There's probably a lot more, but we're going to cover kind of the main 3 today.
The first one is called the marginal cost of production, so this is how much does it cost to produce Bitcoin? Let's go back to the example that we talked about in the last video where Katie was sending Brian Bitcoin.
In that transaction there was a group of people or computers called miners that needed to verify this transaction.
They needed to comb through all of the records or the blockchain of transaction to ensure that Katie had the correct amount of Bitcoin and was able to send this over to Brian and then update the blockchain once the transaction went through that, Brian now has more Bitcoin and Katie has less. So this verification process in this updating of the Ledger or the Blockchain is performed by miners.
Miners are just computers. While anyone could partake in this with their computer, most of the transactions are going through places that look like this that I'm showing on the screen.
Massive amounts of computer is doing all of this verification process for these transactions, and as you can imagine, all of that computing power takes a lot of energy not only just to compute, but also to keep these computers cool in order to perform this validation function. And this is that marginal cost of product.
Now why do the miners do this? Well, the miners do this and they verify these transactions because there's a reward, and that reward is newly minted Bitcoin. So while it's very different than the way that we just print money today, this is essentially the Bitcoin version of creating new currency. When miners verify these transactions, they get Bitcoin added to the blockchain under their name and currently today that reward is about 6 and a quarter Bitcoin.
So every miner that verifies a set of transaction has to pay a cost and energy cost in order to do this. But then in reward they get 6 and a quarter Bitcoin for doing this and keeping the network going and allowing these payments to go through.
And because of that incentive of these newly minted bitcoins that they're getting, the value of those bitcoins must outweigh the cost to do this. Otherwise they wouldn't do it. So this is where the almost the minimum price of Bitcoin comes from this marginal cost of production. So that's the fundamental base driver of Bitcoin. Price is that it must be valued higher than the cost it takes in order for the network to run.
Now this leads well into the next topic of this discussion, which is supply and demand. We're going to focus first on the supply side.
Bitcoin, unlike other crypto currencies, was actually set up to have a fixed to supply. There will only ever be 21 million Bitcoin as of April of this year there was about 18.5M or so Bitcoin in circulation, which means about 88% of Bitcoin has already been created. That last 12% is expected to finish by 2140, a little bit more on why that is later. But for now, the important thing to know is that the supply is fixed for Bitcoin. So what does a fixed supply mean for price?
So this is where we need to go back into our economics class a little bit. So up on the screen I'm going to show you a demand and supply curve and this is just showing the relationship between the quantity or how much Bitcoin you have and the price of Bitcoin based on the supply and the demand.
So if we think about supply first a fixed supply means that the quantity is not changing and isn't dependent on the price. It has a fixed amount, so when you would draw the supply line it would look like this. This it would be a straight up and down line or an inelastic supply curve and this is not something brand new. Actually, a lot of commodities like gold, silver, oil and things that have a fixed amount have a similar type of supply curve.
Now what does this mean for the price? Because all we see here is that no matter what the price is, the quantity stays the same. So what sets how the price increases and decrease? That's where we layer in demand. So a typical demand curve looks something like this curve.
And as the demand for Bitcoin goes up, it shifts the curve up, and by shifting the curve up this up by line you can see that the price increases.
And if the demand for Bitcoin decreases, the price of Bitcoin also decrease, because it's somewhat independent of the supply and that's why the demand for Bitcoin is so important and so critical to the price, and that's the second main influence of bitcoin's price is supply and demand, but as we can see it's mostly driven by demand because that supply is fixed.
This might sound a little strange to you. How do we transact with something that has a fixed amount? The solve for that is that yes, while there's a fixed number of total Bitcoin of 21 million, remember from the first video that Bitcoin is divisible down to the 100 millionth of a Bitcoin. So similar to our dollar, where it's divisible down to the 100th of a dollar or a penny. Bitcoin is divisible all the way down to the 100 millionth. So while there's 21 million bitcoins, you can essentially break that down to much, much smaller values that you can transact with every day and for different goods and services.
So don't let this fixed supply deter you from how the trading or interaction with Bitcoin for goods and services happens.
The other thing that may have risen a red flag is we were just talking about miners and the costs of production and the rewards being these new bitcoins. So what happens when there's no more bitcoins for them to receive for processing the transaction. Well, the one part that I left out is actually when a transaction takes place there's also a small transaction fee that gets paid to these miners.
So while now the biggest incentive is these newly mined bitcoins also some of their profit comes from transaction fees. Now over time as we start approaching this 21 million Bitcoin. The idea is that to get to that 21 million you have to have a ton of transactions. A lot of people have to be using bitcoin. So by that time there will just be such a large volume of transaction fees that miners will get paid via transaction fees versus the newly minted Bitcoin, because remember, we still need those miners to verify these transactions on the network.
Now that's how it's supposed to work. Honestly, no one really knows what's going to happen when we get to this 21 million. But that's the idea. At the end of the day, this complicated web of supply and demand and cost to produce is really all based off of demand how many people are using Bitcoin. How many transactions are happening on Bitcoin and that leads us into the main last topic of this discussion, and it's what influences demand.
How do you get people to interact with Bitcoin? How do you get people to use it? And a lot of that stems from trust. Trust that the currency that you are using is able to be exchanged for goods and services easily and securely and broadly. And that trust is actually something that our current currency, the US dollar, or really any currency around the world is built on.
Right now, the money in your wallet or the money in your bank is not backed by anything other than the government and the regulations that the government has around that money. You don't often think of it this way. I don't often think of it this way that we're really just trusting that that that those dollars in our pocket or the dollars in our bank account can be exchanged for goods and services is because the government says so.
So then why couldn't we have trust in another system? Something that's more secure, more decentralized?
We need trust in order to help drive demand or people to use Bitcoin so that it maintains its price and value. By companies and hedge funds and Elon Musk and others showing that they use and trust in Bitcoin will only help the overall trusts and potentially grow the demand for Bitcoin, which would therefore help increase the price.
Now right on the flip side of that, is if there's a bad news cycle or a country comes out and bans Bitcoin or anything else that is detrimental to people using it that decreases the demand and therefore the price, which is a little bit of what you're seeing now. There are some things coming out of China and other factors that potentially have a negative influence on people using Bitcoin, so therefore the demand drops and the price is lower.
So those are the three main kind of fundamental things that impact the price of Bitcoin.
Now we can't just stop there. There's something else very important that's tied to price that we have to talk and that's inflation or the decrease in purchasing purchasing power of the currency. So this is a pretty hot topic in the US right now. And really all over the globe.
How does Bitcoin deal with inflation? Because that directly influences, or at least is a part of the price of Bitcoin.
So when we think about the US dollar, there's certainly a lot of risk with inflation, because the government can just print a lot of money, and when you print and print and print and print and print, a lot of money, there's just so much money out there that it's going to start having less value. You're going to have less buying power because there's just so much money, and that's inflation.
Now, bitcoin was purposely built with something to help protect it from inflation, and it goes back to the point we were talking about before about the reward that these miners are getting and that last coins are going to take so long to.
That is the idea of halving.
Bitcoin was literally designed in its code that after a certain amount of transaction, the reward that the miners are getting will be cut in half. Now the way the math works out, this happens approximately every four years.
That reward that those miners get for verifying all these transactions gets cut in half. In fact, back when Bitcoin started around 2009, the reward for miners was like 50 Bitcoin.
But now, over time, that reward has dropped down to that about 6 and a quarter Bitcoin. And as we keep transacting that reward will get less and less, and by doing that, we're naturally creating a barrier against inflation because those are newly minted Bitcoin those rewards are the only time that new Bitcoin get added into the available Bitcoin to transact and trade.
There's a lot more of math and things to go into it then, but just know that Bitcoin is naturally built with something that protects them from inflation and not only that, but when we get to those 21 million Bitcoin mined - that's it, so that no more is going to be created in the system. So Bitcoin really is built to not be impacted significantly from its own inflation.
Alright, that's it for now. If you've made it this far, kudos to you. I think it's really important to understand what really drives the fundamental price of Bitcoin, 'cause that really helps you to think about it as you start using it or thinking about potentially investing in it.
It's good to understand how important the demand portion is of Bitcoin now. We talked a lot about price and in the next video I'm super excited to talk about the value of Bitcoin.
So in the famous words of Warren Buffett he said
"Price is what you pay. Value is what you get."
So next time we're going to talk about what do you get out of Bitcoin by using it by investing in it. How do you invest in it? What are the best ways to invest in it? Those are all things in the next video and I'm super excited to talk about that.
I hope that was helpful. If you have any questions at all or something didn't make sense, please comment down below right now and I will get back to you quick and try to incorporate it into the next video if I can. Thanks for watching. I hope you learn something new!
I'm Brian Logen.
Remember to stay healthy. Love your family and Elevate your wealth!
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