New people to the crypto space always face a common question. What exactly causes Bitcoin’s price to rise?
When the world’s biggest cryptocurrency enjoys an unexpected rally, it may possibly indicate a specific reason behind bullish sentiment. But sometimes multiple numbers of factors affect the market and drive the market upward.
Here, we will explore five key things that lead to BTC rallies.
1. Demand Outstripping Supply
Before beginning, we have to understand how Bitcoin’s supply works.
The maximum number of Bitcoins that will ever exist is capped at 21 million, but of them are in market circulation. On average, new BTC tokens enter circulation every 10 minutes.
This blockchain was launched in 2009, and 50 Btc was mined every 10 minutes. In less than 4 years, 10.5 million coins had already been created.
In November 2012, a rare Event took place which was later known as “the halving”. Due to this event, the number of new BTC entering circulation was reduced by 50 percent. The halving process took place every four years roughly (210,000 Blocks).
Graph from BlackRock source shows that there is not much Bitcoin left to find between now and 2140 because almost 93 percent of Bitcoins have already been mined. As of April 2024, just 3.125 BTC is being mined every 10 minutes.
The issue of supply gets even more complicated when you look at how the 19.7 million BTC in existence has been divided.
As per experts’ estimates, up to four million coins could be lost forever, while a further 1.1 million are in many wallets belonging to Bitcoin’s founder Satoshi Nakamoto. Satoshi Nakamoto is the fake name used by the person or group who created Bitcoin.
The investors who hold large quantities of BTC are called whales, and they acquired these tokens in the early days. As per an estimate, these whales own around 1.6 million tokens.
Exchange-traded funds based on Bitcoin’s spot price hold a large part of coins on behalf of investors, who want exposure to BTC’s fluctuations without owning it directly.
Companies like MicroStrategy are trying to gain as much Bitcoin as possible to hold in reserve, as well as governments sitting on large amounts of crypto that are seized from criminal gangs.
All of these things mean that out of 19.7 million BTC, a very small amount of BTC coins is being actively traded, and that brings us to on demand.
Imagine a situation where you’re in the desert and you are willing to pay for water, but there is one shop left with only one water bottle then you have to pay a high amount for that bottle of water. But if there are many shops with large amounts of water bottles, then bottle cost would be much less.
Limited supply means Bitcoin often trades like that bottle of water on a hot day. Just 450 new BTC coins are being created every day, but this isn’t enough for demand from ETFs. As the chart above from WisdomTree shows, ETF issuers purchased 153,293.58 more BTC than was created in the first three months of 2024 alone.
2. Halving Mania
It is important to note that history doesn’t always repeat itself, but halving events that happened in the past can lead to enough increase in Bitcoin’s value, often 12 to 18 months later. As the chart above shows, the world’s biggest cryptocurrency increased by a sudden 428% in 2013, the year after the first halving in 2012.
The halving event that happened in 2016 delivered a huge increase in price in 2017, while Bitcoin’s price jumped by 305 percent in 2020 following a halving in April of that year.
Given how Bitcoin prices have risen, sudden leaps of many thousands of percent are difficult to believe now, but this digital asset still has the capability of doubling or tripling within a couple of months.
An important warning here is that dizzying rises are often followed by crashing falls. When BTC hit a then-all-time high close to $69,000 in November 2021, a punishing bear market followed, with prices falling to just $16,540 by the end of 2022.
3. The Stock Market
Here’s an interesting fact for readers: Since 2012, Bitcoin has been ranked in the top-performing assets class nine times and the worst-performing performance three times. It has never been somewhere in the middle of these classes.
At certain time points in history, Bitcoin has appeared to have a strong relationship with the stock market and important indices such as the S&P 500.
When all of these things happen, it means that a good day on the stock market will result in the Bitcoin price going up too. Oppositely, they’ll both end up falling in tandem.
A good example came in 2020 when the disaster of the coronavirus pandemic became known. Both the asset classes, upper and lower, suffered punishing declines as the world went into lockdown, but slowly increased later in the year when the Federal Reserve started an aggressive campaign of quantitative easing. Traders and analysts alike pay close attention to Bitcoin’s price in dollars.
Price milestones such as 50k dollars, 60k dollars and 70k dollars can end up becoming key psychological barriers, and meaningfully advancing past them can lead to higher prices.
To Bitcoin trading, it is easily compared to an arm wrestle between bulls and bears, those who believe prices are going to rise, and those adamant that contractions lie ahead. Bitcoin cryptocurrency often ends up changing within a very close range around these levels as pressure builds, leading to an outsized move one way or another when resistance breaks.
Nerves can also set in when Bitcoin is near cracking a new all-time high.
4. Breaking News
Last but not least, unexpected developments can cause Bitcoin to rally. Bitcoin price rose substantially after El Salvador’s President, Nayib Bukele, announced that his country is planning to adopt Bitcoin as legal tender in 2021.
There is a time when Elon Musk’s tweets have the power to disturb the market. When Elon Musk added #bitcoin in his bio a sudden 20 percent jump in Bitcoin price was recorded.
There was also feverish excitement when Tesla confirmed in an SEC filing that it was snapping up 1.5 billion dollars in BTC for its balance sheet.
Of course, sudden events can cut both ways with Musk also sending the market downward when he announced the electric vehicle manufacturer would no longer accept Bitcoin as a payment method.
