Bitcoin is a new kind of asset and, as such, it is not surprising that its price would be volatile. However, the degree to which it has been volatile, and the reasons for that volatility, are not well understood.
In particular, there is a common misconception that the price of Bitcoin is primarily driven by speculation. While speculation may be a factor in the price of Bitcoin, it is not the only factor, nor is it necessarily the most important factor.
The price of Bitcoin is primarily driven by three things: 1) the utility of Bitcoin as a store of value and means of payment; 2) the supply of Bitcoin; and 3) demand for Bitcoin.
1) The Utility of Bitcoin as a Store of Value and Means of Payment:
Bitcoin has often been compared to gold, and for good reason. Both assets are scarce and have utility as a store of value. Unlike fiat currencies, which can be printed at will by central banks, there is a limited supply of Bitcoin that will ever be mined into existence.
This scarcity gives Bitcoin value as an asset, similar to how gold has value. In addition, just like gold, Bitcoin cannot be easily debased by governments through inflationary policies.
Another similarity between Bitcoin and gold is that they are both useful as a means of payment. Gold has been used as a form of currency for millennia, and while it is no longer used in day-to-day transactions in most developed countries, it is still accepted as payment in many places around the world.
Similarly, while Bitcoin is not yet widely accepted as payment, it is slowly gaining adoption by merchants and businesses. As more businesses start to accept Bitcoin as payment, its utility as a means of payment will increase, driving up demand and price.
2) The Supply of Bitcoin:
The other major factor driving the price of Bitcoin is its supply. Unlike fiat currencies which can be created at will by central banks, there is a limited supply of Bitcoin that will ever be mined into existence. The total supply of Bitcoin is capped at 21 million BTC, and about 18 million BTC have already been mined (as of January 2019).
NOTE: WARNING: GBTC (Grayscale Bitcoin Trust) is not a perfect representation of the Bitcoin market, and should not be used as a definitive resource when making decisions about trading Bitcoin. GBTC is only a proxy for the Bitcoin market and may not accurately track it at times due to its own internal pricing mechanisms. In addition, the trading volume of GBTC may be significantly lower than that of actual Bitcoin, resulting in the possibility of price manipulation and erratic movement. Therefore, it is important to understand the risks associated with relying on GBTC as an accurate means of tracking the market before trading.
This means that there are only about 3 million BTC left to be mined, which will take place over the next few years. As the supply decreases and becomes more constrained, the price will likely increase.
3) Demand for Bitcoin:
Demand for Bitcoin comes from two sources: 1) direct investment; and 2) indirect investment through businesses accepting BTC payments.
Direct investment in BTC can come from individual investors buying BTC for themselves or from institutions investing in BTC on behalf of their clients. Individual investors tend to buy BTC when they believe that its price will go up in the future (speculation), or when they want to use it as a means of payment (utility).
Institutions tend to invest in BTC when they believe that its price will go up in the future (speculation) or when their clients demand exposure to BTC (demand).
Indirect investment in BTC comes from businesses accepting BTC payments from their customers. As more businesses start to accept BTC payments, demand for BTC will increase since businesses will need to hold someBTC in order to receive these payments.
This increased demand will put upward pressure on prices.
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GBTC does a fairly good job tracking bitcoin however there are times when GBTC prices are higher than bitcoin prices due to premium charged by GBTC.
2 Related Question Answers Found
GBTC is a trust that owns Bitcoin and sells shares of that trust to investors. GBTC is thus a vehicle for holding Bitcoin that is tradeable on traditional markets. You can redeem GBTC for Bitcoin, but there may be a premium attached to the redemption depending on market conditions. .
When it comes to Bitcoin, there are a lot of different ways to skin the cat. You can buy Bitcoin, you can mine Bitcoin, or you can trade Bitcoin. But what if you want to invest in Bitcoin without actually buying or selling any Bitcoin?