What Determines The Price Of Bitcoin?

Bitcoin has lost over half its value in less than 6 months. Shortly before Christmas, it was trading at over $19,000. Today, it is just $8,299. Will its price continue to fall, or is recovery just around the corner? Unsurprisingly, Bitcoin investors are predicting meteoritic rises will recommence any day now. But so far, Bitcoin has refused to cooperate, staying stubbornly stuck below $10,000. So what determines the price of Bitcoin? How can we know whether it will rise again?

PARIS, FRANCE – MAY 16: In this photo illustration, a visual representation of the Bitcoin Digital Cryptocurrency is displayed on May 16, 2018 in Paris, France. Bitcoin is an electronic currency that has seen an incredible increase in 2017, its price has risen up to 20,000 euros but since the beginning of 2018, a sharp decline has seen it lose more than half of its value. (Photo by Chesnot/Getty Images)

Cryptocurrency analysts Fundstrat think they have found a way of predicting the future price of Bitcoin. They used the expected path of breakeven Bitcoin mining costs to forecast that Bitcoin will reach $36,000 by the end of 2019:

Fundstrat on Twitter

Fundstrat Executive Summary

But this method has come in for considerable criticism from the Bitcoin community. On Twitter, Samson Mow, chief strategy officer of Blockstream, claimed that Fundstrat’s forecast relied on a controversial economic theory:

Samson Mow on Twitter

The “labor theory of value” essentially says that the price of a good or service is determined by the work required to produce it. It is popular with Marxist economists, but most other schools of economics have abandoned it in favour of “subjective valuation” which says that the value of a good or service is whatever someone will pay for it, regardless of the effort that went into producing it. Mow’s argument is that subjective valuation is the right way to understand Bitcoin’s price dynamics, not the labor theory of value.

Of course, if the producer values the effort that goes into producing the good or service more highly than the market will pay, they will stop producing it. When prices fall, therefore, marginal producers tend to drop out, reducing the supply and hence raising the price. Producers who have inventories to run down and/or sufficient reserves to enable them to run at a loss may continue production for some time. But as time goes by, more and more producers drop out until prices rise enough for the market to clear.

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