This blog is part of the “Crypto Compliance Corner” series from our Chief Compliance Officer, Peter Singer.
Welcome back, readers! When I answer the question “So what do you do for work?”, I get equal looks of confusion, interest, and skepticism along with “Oh yeah, I’ve heard of bitcoin but have no idea about it.” One response I get often — the one that inspired today’s topic — is “How / why does the price change so drastically on a seemingly daily basis?” To quote my sister, “I don’t get it…its value isn’t held to anything stable like traditional currency being held to the value of gold.” There’s a lot to unpack there, so let’s begin, shall we?
Multiple factors impact the exchange rate of a bitcoin to $1 US, just as various factors influence the value of a company’s share of stock. We discussed one last time: the regulatory environment. Right now, those who make the regulations don’t know which agency will have primary jurisdiction, what the rules will be, or even if/when they’re going to be created. Fear, uncertainty, and doubt (aka FUD in crypto lingo) cause significant price changes.
Another factor is fueled by the consumer perception that bitcoin has value. What do I mean by that statement? The value of the US currency is NOT supported by gold. That’s right — the US stopped using the gold standard in 1971. What makes $1 worth $1? You’ve heard the term “fiat currency,” right? That’s why. If you haven’t heard of this term, “Fiat” is a Latin term that means “let it be done” which comes from fieri which means “be done or made.” The government says $1 = $1, and viola — the value is set. Similarly, the value of a bitcoin is based, in part, on the belief that bitcoin has and will continue to have value.
The last major factor (and by no means is this list all-inclusive) that we’ll talk about is the most basic one: supply. Unlike dollars where an endless supply can be printed, bitcoins are limited. There are approximately 17 million BTC in existence, and only 21 million will ever be created. What happens when you have a limited amount of supply with a significant demand? Right again — price changes!
When you combine an uncertain regulatory environment, market forces, and consumer perceptions of value on a limited supply of an item, then the price of the item will change accordingly. So, there you go — hopefully you (and my sister if she listened to me this far) are now enlightened. From my corner to yours — thanks for stopping by.