Questions about Bitcoin's price formation

[nodynod]

Hi all,

Hope you're doing great. I am kind of a newbie to this forum, still discovering this incredible community !

As I'm actually working in research in the social sciences, I am very unaware of all the pure technicalities of the BitCoin.

For the purpouse of one of my sociology papers, I'd like to know if there is any technical papers that u guys can redirect me to in order for me to grasp all the mechanism underlying price formations.

I'm not afraid of equations and very technical stuff, so please share any resources that you might have.

Thank you.

[1713569909]

1713569909

[tadamichi]

If you wanna understand the basics of how bitcoin works, i suggest you start with the whitepaper: https://bitcoin.org/bitcoin.pdf.

About price formation here are some academical papers related to bitcoin: https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=price+formation+bitcoin&btnG=

What i would personally look into as factors:

- The cost of mining

- Supply shocks like halving events

- On Chain activity

- Monetary policy

- Competing currencies

- Degree of adoption

- Exchange capabilities

- Scarcity

- Security

- Speculation

- Market sentiment (there’s indicators like the fear & greed index, might be worth looking into what factors they take into account)

- Market manipulation

And here an interesting thought:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
- boring grey in colour
- not a good conductor of electricity
- not particularly strong, but not ductile or easily malleable either
- not useful for any practical or ornamental purpose

and one special, magical property:
- can be transported over a communications channel

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange.  (I would definitely want some)  Maybe collectors, any random reason could spark it.

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value.  But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.

(I'm using the word scarce here to only mean limited potential supply)

[nodynod]

Thank you tadamichi for your response, it will be of great help for me.

Another question that I was thinking about (mind sound silly to some of you) but is the BitCoin supply/demand levels on independent exchange platforms (Binance etc...) have any influence on BitCoin intrinsic value ? i.e. if there are more people demanding BitCoin on exchange platforms, will this result in an upgrande in the coin's value ?

Also, a lot of people that I talked to always referred me, beyond other factors such as market sentiment etc.., to the "supply" and "demand". I understand, and maybe I'm wrong, that "supply" are newly mined bitcoins that are put into the market, but what is "demand" ? Because it seems to be two kinds of demands : the exchange platforms demand, and the "original" demand for newly mined bitcoins.

It's still a bit confusing for me so please don't mind the foolishness of some of my questions.

And thank you again for your response.

[tadamichi]

Thank you tadamichi for your response, it will be of great help for me.

Another question that I was thinking about (mind sound silly to some of you) but is the BitCoin supply/demand levels on independent exchange platforms (Binance etc...) have any influence on BitCoin intrinsic value ? i.e. if there are more people demanding BitCoin on exchange platforms, will this result in an upgrande in the coin's value ?

Also, a lot of people that I talked to always referred me, beyond other factors such as market sentiment etc.., to the "supply" and "demand". I understand, and maybe I'm wrong, that "supply" are newly mined bitcoins that are put into the market, but what is "demand" ? Because it seems to be two kinds of demands : the exchange platforms demand, and the "original" demand for newly mined bitcoins.

It's still a bit confusing for me so please don't mind the foolishness of some of my questions.

And thank you again for your response.

No question is too dumb to be asked. I’ll try to explain it simplified.

Another question that I was thinking about (mind sound silly to some of you) but is the BitCoin supply/demand levels on independent exchange platforms (Binance etc...) have any influence on BitCoin intrinsic value ? i.e. if there are more people demanding BitCoin on exchange platforms, will this result in an upgrande in the coin's value ?

Think of what you see on the exchanges like the lowest price someone is willing to sell his bitcoin for at this particular moment in time, this is the exchange rate.

The supply is basically -> how much Bitcoin is sold at the moment.
The demand is -> how much Bitcoin is bought at the moment.

If more Bitcoin is bought than sold -> the price increases.
If more Bitcoin is sold than bought -> the price decreases.

Bitcoin itself is it’s own monetary system and there will be never be more than 21 million of them, so what you see on the exchange is someone trading Bitcoin into another currency like the dollar for example, similar to when u travel to another country you will trade your currency into the local one.

In Bitcoin itself there’s no fluctuation if you own 1 Bitcoin it will always be 1 Bitcoin, so the fluctuation that you see is just the exchange rate into other currencies.

And sure the more people buy Bitcoin the higher the exchange rate will be.

And depending on what exchange you’re on, there can be different exchange rates depending on supply and demand in each individual exchange.

The reason you’re seeing similar prices on different exchanges is because of arbitrage.
https://www.investopedia.com/terms/a/arbitrage.asp

Because it seems to be two kinds of demands : the exchange platforms demand, and the "original" demand for newly mined bitcoins.

Newly mined Bitcoin go into the miners possession, who just attached a new block. Typically they have running businesses expenses, so they sell them on a exchange to cover them, but they can also keep the bitcoin if they wanted to. So mining currently increases the amount of Bitcoin that are being sold on exchanges, but the subsidy miners get decreases every 210.000 blocks, so over time they will have less and less new bitcoin to sell on exchanges(or keep).
https://www.investopedia.com/bitcoin-halving-4843769

And don’t forget Bitcoin exists apart from exchanges in its own network, you can hold your own funds like being your own bank. To sell them on an exchange they’re sent to the bitcoin address of the exchange and from there you can trade them into other currencies. They keep the bitcoin you get the money. Or when you’re buying, they get the money and you can send the bitcoin to your own Bitcoin address.

[d5000]

Another question that I was thinking about (mind sound silly to some of you) but is the BitCoin supply/demand levels on independent exchange platforms (Binance etc...) have any influence on BitCoin intrinsic value ? i.e. if there are more people demanding BitCoin on exchange platforms, will this result in an upgrande in the coin's value ?

This is an interesting question, and I think the answer is yes, but in a rather indirect and more "long term" way.

First, a growing exchange rate leads to higher incentives for miners to participate, so the hashrate will increase. A substantial hashrate increase elevates also the costs to attack the network via an 51% attack, so the security of the network will grow. It will thus be more suited to store and transfer higher values, which is a plus for the "intrinsic" value. However this is a relatively slow process, and above all: if the exchange rate decreases, then normally it will take some time until the hashrate follows the price and lowers, or it won't follow at all. There is some inertia in this relation.

Second, a growing demand on the markets reflected in the exchange rate could be seen as an indicator for growing capital influx, and thus incentivating businesses to participate in the Bitcoin ecosystem. This would also make the network more "valuable" as there are more services for Bitcoin users and thus the utility for them grows.

For your other question I think @tadamichi answered it well.

[nodynod]

Thank you d5000 for this interesting response. Very informative !
Also thank you tadamichi for all your explanations. That's very nice of you.

I may have other questions as I get a bit further in my research, will keep you posted.

[tadamichi]

Thank you d5000 for this interesting response. Very informative !
Also thank you tadamichi for all your explanations. That's very nice of you.

I may have other questions as I get a bit further in my research, will keep you posted.

You’re welcome. It’s always nice having people from different areas come here, since Bitcoin is really that interdisciplinary.

Also trying to define the intrinsic value of something like Bitcoin is really hard, because the traditional methods to determine this, aren’t designed for this. We’re really on novel ground here. This question made me curious myself now.

I think d5000 made an amazing point, by taking hashrate, security, store and transfer of value into account.

You could even look at Bitcoin like a social consensus mechanism geared towards, how humanity can safely store and distribute their resources, without invalidating the individual. While at the same time building a worldwide distributed network of people, that can interact with each other, without the need for trust. The whole game theory behind Bitcoin takes many social dynamics into account and then Technology was used to find a way to solve these issues.

However this was just an example into the social factors that play a part in Bitcoin.

I found another source that also looks at the intrinsic value of cryptocurrencies.
https://link.springer.com/article/10.1007/s12525-021-00491-2

[Darker45]

Also, a lot of people that I talked to always referred me, beyond other factors such as market sentiment etc.., to the "supply" and "demand". I understand, and maybe I'm wrong, that "supply" are newly mined bitcoins that are put into the market, but what is "demand" ? Because it seems to be two kinds of demands : the exchange platforms demand, and the "original" demand for newly mined bitcoins.

In this respect, supply could also be understood as that which is available in the market and that which is provided for by the code, which is 21 million and will be released in a specific manner. As regards demand, is there such a thing as the original demand?

Bitcoin demand could probably be measured through exchanges because it is through these platforms where people mainly do their purchases, although these exchanges might not include OTC platforms where large institutional investors may do their buying.

There are blockchain analytics firms like Glassnode which measure Bitcoins available on exchanges. In a way, this could be used as metric for demand. After all, there's probably no Bitcoin sent to an exchange other than for selling. And trading is a zero-sum game. Somebody could fill one's ask order only if somebody else on the other end bids for it. The numbers provided by these analytics firms fluctuate probably reflecting demand, as well as supply of course. Large mining companies probably make use of these numbers as well in their decision whether or not to send newly mined Bitcoin to exchanges for selling.

But perhaps one of the best barometers reflecting demand is the price.

[Apocollapse]

There's no such "underlying Bitcoin price formations" because Bitcoin didn't backed or collateralized with anything. It only stand between supply and demand, nothing more. If you see Bitcoin price drop, then the demand is less and many people prefer to sell their coins, vice versa. Calculating Bitcoin price due to mining fee, events, adoption, security etc doesn't make sense. We already have seen some countries accept Bitcoin as a legal tender, this is a good news and the truth Bitcoin price didn't increase.

[Zilon]

Each time a new Bitcoin is minted through mining there is a supply and once it is traded in an exchange there must be a demand to complete the cycle. Now on the demand /supply curve there is a price struggle between this two curves making the bigger party control the trend. The trading between this two price flows are carried out on exchanges either centralized or decentralized with each exchange having their different  trading Volume and market capitalization this two factors too play a key role in deciding the price of this assets

[palle11]

If you see Bitcoin price drop, then the demand is less and many people prefer to sell their coins, vice versa. Calculating Bitcoin price due to mining fee, events, adoption, security etc doesn't make sense. We already have seen some countries accept Bitcoin as a legal tender, this is a good news and the truth Bitcoin price didn't increase.

To an extent these points that you have listed also contribute to that demand of bitcoin and that makes sense if countries have started making bitcoin legal that means more investors will come too and demand will improve. I believe for me that demand of bitcoin plays a role from adoption. Fees and the others too can contribute to the choice for bitcoin or not for bitcoin depending on the fees , security of investment.

[tadamichi]

There's no such "underlying Bitcoin price formations" because Bitcoin didn't backed or collateralized with anything. It only stand between supply and demand, nothing more. If you see Bitcoin price drop, then the demand is less and many people prefer to sell their coins, vice versa. Calculating Bitcoin price due to mining fee, events, adoption, security etc doesn't make sense. We already have seen some countries accept Bitcoin as a legal tender, this is a good news and the truth Bitcoin price didn't increase.

If you’re asked to research the underlying factors that influence the market price of Bitcoin, it’s not enough to just write supply&demand, because we already know this.

But what actually influences the demand, what actually influences the supply? This is what is here to find out. Saying just supply&demand is saying nothing, then we can just stop doing science altogether. The driving factors behind Bitcoin are completely different than something like a loaf of bread, yet they’re both just supply&demand(that’s why it’s not enough to say this). So the question here is, what are they really? This what the job of researchers is, to try and find out. It’s not about calculating the Bitcoin price manually on the basis of these factors, it’s about finding out the determining factors behind the market price.

In this respect, supply could also be understood as that which is available in the market and that which is provided for by the code, which is 21 million and will be released in a specific manner. As regards demand, is there such a thing as the original demand?

There is a catch in this, because not all of the coins are mined yet and not all of the 21 millions coins will be sold on the market. In Bitcoin itself the supply is fixed, when the block rewards run out. But on the free market the supply actually varies(Bitcoins being sold).