It’s easy to see the bitcoin price go up and feel like you’ve missed the boat. However, many individuals and institutions believe that Bitcoin is just now starting to heat up. So what is driving the price of bitcoin so high, and how could it continue to rise beyond these levels? The best place to start is by understanding the backbone of Bitcoin economics: supply and demand.
Supply And Demand
The problem with projecting future prices stems from the difficulty in predicting supply and demand. Bitcoin is unique in that its supply is on a known schedule; it is embedded in software code that cannot be changed by any person or organization. This code states that the new supply of bitcoin is cut in half every four years. The first mining subsidy halving occurred in 2012 when the new supply was cut in half to 25 coins released approximately every 10 minutes. In 2016, it was cut in half again, down to 12.5 new coins created every 10 minutes. In May 2020, the most recent Halving occurred, meaning there are now only 6.25 new coins created every 10 minutes. In short, the new incoming supply of Bitcoin becomes increasingly scarce as time goes on.
Let’s compare the mechanics of Bitcoin with something like the price of cars. If there’s a huge increase in demand for cars, there would initially be a shortage and the price would shoot up. However, the car producers can react by manufacturing more cars. Once this new supply of cars is available, the price will come back down.
Now, imagine what would happen if the new supply of cars was strictly limited: only 1,000 new cars could be created each year. There simply would not be enough cars to go around, so the price would go up (and not come back down). What if we go even further and cut the annual supply of new cars in half, so that only 500 new cars could be created each year? It may lead to a mania in the price of cars as people start to realize that owning a car is becoming increasingly…