Why the Bitcoin rate is relevant

The Bitcoin course receives a large part of the public eye. Rightly, because the price combines all information available on the market and gives an indication of the fundamental value of BTC.

The development of the Bitcoin course is enormous. In the first two weeks of the new year alone, the rate of the crypto reserve currency heaved up to 40 percent above the closing level of the previous year. The current annual high is 41,880 US dollars (USD).

Markets and Prices

In the interplay between supply and demand, the price plays a decisive role. You could say that the price of an asset reflects the essence of what price the market deems appropriate. Expectations about the future value, the availability of the good, the news situation, the available information and the overall economic situation play a role.

Markets then bring buyers and sellers together and a price arises where supply and demand meet. So it can be said that the pricing mechanism is exactly what markets do: They give goods a fair price based on all the information available in the market.

Pricing and Bitcoin

So what is fair value for bitcoin? Every market participant would probably answer this question differently. For some, Bitcoin is a digital replacement for gold — and should therefore be worth at least as much.

This is precisely why markets are volatile. For one, BTC was significantly overvalued at USD 40,000, which is probably why they sold there. For the other, BTC is still fairly valued even at USD 100,000, so she will also shop at USD 40,000. If the majority of market participants come to the conclusion that the current level is too high, the price will fall as more sell orders than buy orders are placed — and vice versa.

In the end, it depends on what benefit all market participants see in Bitcoin. And with a new type of asset (as a reminder: 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 struggling to develop 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 the volatility is falling. While price adjustments of 30–40 percent were the order of the day in the past cycles, the volatility (shown here in red), measured using the standard deviation of the price, is around 19 percent these days.

This is not least due to the fact that more and more professional players are pouring into the market with MicroStrategy, Square and derivatives such as Bakkt Futures and Bitcoin warrants. This increases its efficiency and takes away its volatility.

The course is the most important signal for the adaptation of Bitcoin. In principle, the Bitcoin rate is enough to determine where the market has reached. This is why the course deserves a lot of attention.

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Why the Bitcoin rate is relevant was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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