Why the bitcoin exchange rate is relevant

The Bitcoin price accounts for a large part of public attention.

Rightly so, because the price combines all the available information on the market and gives an indication of what fundamental value BTC has.

The history of the bitcoin price is already tremendous. In the first two weeks of the new year alone, the price of the cryptocurrency rose by up to 40 percent above the closing level of the previous year. The current high for the year is 41,880 US dollars (USD).

The Bitcoin price trend in US dollars in the monthly chart.

At BTC-ECHO, we also deal with the price trend in the market update on a daily basis. But why do people keep talking about the price?

Markets and Prices

In the interplay of supply and demand, the price plays a crucial role. You could say that the price of an asset reflects the essence of what the market considers to be an appropriate price. Expectations about the future value, the availability of the asset, the news situation, the available information as well as the overall economic situation all play a role.

Markets then bring buyers and sellers together, and where supply and demand meet, a price is created. Thus, it can be stated that the price discovery mechanism is exactly what markets do: they give goods a fair price according to all available information in the market.

Pricing and Bitcoin

So what is a fair value for bitcoin? This is a question that every market participant would probably answer differently. For some, Bitcoin is a digital substitute for gold – and should therefore be worth at least as much.

This is exactly why markets are volatile. For one, BTC was clearly overvalued at $40,000, which is probably why people sold there. For the other, BTC is still fairly valued even at USD 100,000, so they will buy even at USD 40,000. If the majority of market participants conclude that the current level is too high, the price will fall because more sell orders will be placed than buy orders – and vice versa.

In the end, it comes down to what benefit the totality of market participants see in Bitcoin. And with a novel asset (remember, Bitcoin is only twelve years old), the road to establishment can be bumpy. Looking at the volatility, one can only conclude that the market is having some difficulty developing a fair value for Bitcoin. In other words, market participants disagree about what Bitcoin actually is and how much the asset is ultimately worth.

But volatility is falling. Whereas in previous cycles, price adjustments of 30-40 percent were the order of the day, these days volatility (shown here in red), as measured by the standard deviation of the price, is about 19 percent.

Bitcoin volatility (red graph) and price (blue graph).

This is probably due in no small part to the fact that more and more professional players are flooding into the market with MicroStrategy, Square, as well as derivatives such as Bakkt futures and Bitcoin warrants. This increases its efficiency and takes away its volatility.

The price trend is the most important signal for Bitcoin’s adaptation. In principle, the Bitcoin price is enough to determine at what point the market has reached. Therefore, the price trend rightly deserves a lot of attention.

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