How is Bitcoin’s Price Decided?

How is the Bitcoin Price Decided?

Since Bitcoin is decentralized and not backed up by authorities like the government or banks, none of their monetary policies, inflation, or deflation rates determine its price. Instead, Bitcoin prices are influenced by various factors that are often uncontrollable, including market demands, regulatory upgrades, media, news, and economic factors.

For instance, in the past, Bitcoin prices were affected by major world economic events, such as stock market surges and slashes, the COVID-19 pandemic, and the Ukraine war. These events affected market/investor sentiments, thereby impacting Bitcoin’s demand in the past.

In addition to these indirect events, some direct factors, like the cost of creating Bitcoin, also impact its prices. Furthermore, the Bitcoin ecosystem is a fully decentralized monetary system in which the creation of Bitcoin is not controlled by the government.

Bitcoin follows a predefined protocol and is designed with a maximum supply of 21 million. Bitcoins are introduced to the market through a complex technological process called Bitcoin mining, where miners solve mathematical algorithms and mine new Bitcoins.

The only change in the Bitcoin protocol is the change in block rewards for miners. This process of reducing mining rewards every four years is called Bitcoin halving. The motive behind halving is to decrease the number of Bitcoins in circulation and create scarcity.

In simple terms, Bitcoin halving slows the issuance of new coins, increasing scarcity and potentially boosting demand. This often drives prices higher, reinforcing Bitcoin’s role as a hedge against inflation. With a fixed supply of 21 million, the last Bitcoin is expected to be mined by 2140.

Factors Influencing Bitcoin Price

Bitcoin is decentralized, and no single authority controls its prices. Multiple factors work together to influence Bitcoin prices. Let’s discuss some of those prominent factors.

1. Supply and Demand

Any asset’s supply plays a crucial role in deciding its price. Likewise, Bitcoin’s supply determines its price. Bitcoin is designed with a limited supply of 21 million. Thus, it is scarce.

Additionally, during Bitcoin halving, which occurs every four years, the Bitcoin mining rewards are halved, further creating scarcity. Past halving events clearly suggest that Bitcoin prices fluctuate highly during these events.

In short, the Bitcoin supply, which changes during the Bitcoin halving event, predominantly determines Bitcoin price.

On the other hand, Bitcoin’s popularity due to its decentralized nature has attracted many investors worldwide. Often, countries with high inflation rates, like Venezuela, prefer Bitcoin to use it as a hedge against inflation. However, Bitcoin is criticized for being used by people to transfer large amounts of money for illegal activities.

Moreover, Bitcoin’s price soared whenever something significant happened in the crypto industry. For example, when the Securities and Exchange Commission approved a few Bitcoin Spot ETFs in 2024, the Bitcoin price increased due to increasing demand.

2. Competition

Bitcoin is the most popular cryptocurrency even in 2025, regardless of the many new cryptocurrencies available. However, investors and crypto enthusiasts try their hands at other alternative cryptocurrencies, such as altcoins. For example, Ethereum quickly gained the attention of many due to its potential in Decentralized Finance (DeFi) applications.

When users become aware of potential altcoins and their possibilities, they tend to try them. Moreover, the constant urge to find an effective alternative to Bitcoin has always existed. For example, Tether, BNB, USDCoin, and Solana are some of the top cryptocurrencies that are gaining momentum.

However, Bitcoin has not just survived but thrived in the crypto industry. Thus, its prices have remained high despite the competition of alternative cryptocurrencies.

3. Regulations

Bitcoin was created as an alternative to centralized fiat currencies. Cryptocurrencies, including Bitcoin, are decentralized, enabling users to transfer across borders via a regulation-free ecosystem.

Since Bitcoin is not regulated by the government, it is free from all government-imposed regulations, unlike fiat currencies. However, regulatory developments involving Bitcoin can highly impact its price.

For instance, when the US approved a few ETFs, Bitcoin prices surged. On the flip side, when China banned cryptocurrency and Bitcoin trading in September 2021, it drastically impacted the cryptocurrency’s supply, demand, and prices. However, when mining farms were moved from China to other crypto-friendly countries, the prices again picked up.

4. Social Media and Influencers

When celebrities and social media influencers share about cryptocurrencies, their opinions and views significantly affect the crypto price. Elon Musk’s tweet on Dogecoin surged its prices to a peak the following week. Many started exploring Dogecoin. Hence, social media posts from well-known people can influence investor’s sentiments, thereby impacting crypto prices.

5. Media and Speculation

Media and speculation do play a role in determining Bitcoin prices. A debate on Bitcoin by experts, an interview of a crypto expert on the news channel or some celebrity sharing his views on Bitcoin on the TV channel would reach the masses. The prices may surge up if the news is something positive and slashes down if it is negative.

Why is the Bitcoin Price Highly Volatile?

Bitcoin is well-known for its highest trading volumes. However, the Bitcoin market is relatively smaller than global financial markets. Thus, the prices will fluctuate drastically even with less money involved.

Since Bitcoin’s supply is limited and the creation of new Bitcoins follows a specific protocol, with a periodic cut in supply through halving, demand fluctuates as well. If the demand for Bitcoin is reducing or deflationary (which is not happening), only then will Bitcoin prices be stable.

As discussed earlier, news events, uncertainties in the future intrinsic value of cryptocurrency, and cryptocurrency as a store of value will play a significant role in deciding the Bitcoin price. Besides, cyber attacks, security breaches will also play a role in influencing the Bitcoin price.