“Demand is defined as the desire for a commodity, backed by the ability to buy, and willingness to pay for it, at a given price, during a particular period of time.” (Dr. Alfred Marshall)
“The supply of a commodity may be defined as the amount of the commodity which the sellers able a willing to offer for sale at particular price during certain period of time.” (Dr. Alfred Marshall)
Above are the two most famous and widely accepted definitions of Demand and Supply, two age-old phenomena on which almost the entire global economy is based. No matter how traditional or modern, primitive or advanced, new or old an industry may be, it simply cannot escape these two factors. The Bitcoin industry, or the larger crypto industry, is no exception!
As per Bitcoin.org, an authoritative web portal on Bitcoin says,
“The price of a bitcoin is determined by supply and demand. When demand for bitcoins increases, the price increases, and when demand falls, the price falls.”
According to the law of demand and supply formulated by the Father of Modern Economics, Alfred Marshall, demand will rise if the prices fall, and supply will rise if the prices rise. As demand rises, price tends to increase simultaneously and so does supply. However, if the demand declines, prices start to drop, and the supply also tends to decrease for the period.
The phenomena of demand & supply are apparently more relevant in the crypto industry than most others. More than people start buying BTC, the higher the demand, and resultantly the prices rise. Also, when the prices rise, and the demand is on the up, miners invest more resources in supplying mining new blocks to ensure constant suitable supply. Therefore, it is safe to say that demand and supply are the factors that decide Bitcoin valuation.
Are these two the only factors that decide the value?
Well, not entirely.
Yes, prices of Bitcoin can decline only in demand starts falling and vice versa, but there are several factors other than the will of a buyer/seller that affect demand and supply, which why the original laws of demand and supply formulated by Dr. Marshall were based on certain assumptions. There are a number of factors that may not be directly or indirectly related to the Bitcoin industry, yet it will affect the demand.
For instance, if oil prices come down significantly, people will see it as an opportunity to make profits in the oil market, as the recovery of prices is bound to happen in a matter of time. Opportunist Bitcoin investors may cash their BTC holdings and invest in oil money to make a crypto profit. The same goes for Gold and other metals and commodities as well.
On the other hand, if prices for electricity consumption goes up, miners will reduce their supply in the market, creating a shortage, and hence, increased prices. Likewise, political impositions in major markets, similar to the RBI ban of 2018, can cause a serious fall in demand, causing the prices to decline substantially. Contrastingly, if countries having sanctions imposed on them start using BTC as a mode of payments, like Venezuela, Zimbabwe, etc., the demand for BTC will rise even at a high price, which will further push the price upwards.
Similarly, the demand for BTC will also be seriously impacted by the amount of utility it can provide. For instance, if giants like McDonald’s, or Apple, or Levi’s start accepting payments in BTC, the demand will increase significantly, as BTC is easy to use, transactions are quick, and charges are far too less as compared to digital fiat money.
It can be said that demand and supply are the primary factors that evaluate Bitcoin, but these two factors are not independent. This means that decisions taking simply on price predictions are not the only facet of demand and supply. There are several other factors, including politics, price of contemporary markets, utility, etc., that affect demand and supply indirectly.