Bitcoin Price Fluctuation Principles: A Comprehensive Analysis of Supply and Demand, Policies, and Market Factors

Bitcoin reached a historical high of $73,777 in March 2024, compared to a price of around $15,000 over a year ago, an increase of nearly 5 times. What are the driving factors behind this significant price fluctuation? Let's delve into the core principles of Bitcoin price changes.

Supply Scarcity and Halving Mechanism

The primary reason for the rise in Bitcoin prices is its limited supply. The total amount of Bitcoin is fixed at 21 million coins, and approximately 19 million coins have been mined globally. It is noteworthy that the Bitcoin halving event has a significant impact on the market:

• Before April 2024: Daily new supply is 900 coins.
• After April 2024: Daily new supply will be halved to 450 coins

This supply reduction mechanism has historically triggered multiple Bitcoin price pump cycles, as the reduction in new supply will raise prices under stable or increasing demand.

ETF and Institutional Participation Drive Demand Growth

Starting from January 2024, 11 Bitcoin ETFs (Exchange-Traded Funds) have been approved in the market, bringing three major changes to the Bitcoin market:

1. Significant liquidity improvement: Making it easier for ordinary investors to participate in Bitcoin trading.
2. Institutional Endorsement Enhancement: Increased market recognition of digital assets.
3. Increase in Demand: Driving Price Pump

According to market data, the trading volume of Bitcoin significantly increased in the months following the ETF launch, with the inflow of institutional funds becoming an important force driving the price pump.

Market Structure and Liquidity Factors

As a representative of decentralized asset classes, Bitcoin has attracted many high-net-worth individuals to allocate part of their assets to it. Its price fluctuation is also influenced by the following market structural factors:

• Derivatives Leverage Trading: Amplifying market fluctuation
• Funding Rate Changes: Affect short-term trading behavior
• Exchange Order Flow: Reflects market supply and demand dynamics

Data shows that during periods of high Fluctuation, the daily trading volume on derivatives trading platforms can reach billions of dollars, and this speculative activity amplifies price Fluctuation.

Impact of the Macroeconomic Environment

Bitcoin prices are influenced by broader macroeconomic factors:

1. Inflation: In a high inflation environment, Bitcoin is often seen as a hedge tool.
2. Interest Rate Policy: Changes in central bank policy have a significant impact on the cryptocurrency market.
3. Economic Uncertainty: Global economic fluctuations have led investors to seek safe-haven assets.
4. Correlation of Financial Markets: The correlation with traditional asset classes is evolving.

When the economy faces recession risks, Bitcoin may experience rapid price declines in the initial stages, a phenomenon that has occurred multiple times during past market pressures.

Regulatory Environment and Technological Development

The price fluctuation of Bitcoin is also influenced by both changes in the regulatory environment and technological developments:

• Regulatory Policy Changes: Changes in the attitudes of various countries towards cryptocurrencies can lead to market Fluctuation.
• Security Incident: Exchange security vulnerabilities or hacker attacks can cause investor panic.
• Technical Upgrade: Network protocol improvements enhance investor confidence
• Stablecoin supply changes: As an indicator of market liquidity, it affects overall market dynamics.

The increase in regulatory clarity often prompts institutional funds to flow into the market, while significant security incidents may lead to a substantial decline in trading volume and liquidity in the short term.

Overview of Factors Affecting Bitcoin Price

| Category of Influencing Factors | Specific Mechanism | Market Impact | |------------|---------|---------| | Supply Factors | Limited Total Supply, Halving Mechanism | Long-term Support for Price Increase | | Demand Factors | ETF Launch, Institutional Participation | Increase Market Liquidity and Recognition | | Market Structure | Derivatives Trading, Leverage | Amplifying Short-Term Price Fluctuation | | Macroeconomics | Inflation, interest rate policy | Impact on capital flows and investment preferences | | Regulatory Environment | Policy Changes, Compliance Requirements | Impact on Market Confidence and Participation | | Technical Factors | Network Upgrades, Security Incidents | Impact on Infrastructure Stability |

The price fluctuation of Bitcoin essentially reflects the interaction of various market forces. By understanding these fundamental principles, investors can make more informed decisions in the cryptocurrency market. Before participating in Bitcoin trading, it is recommended to fully understand its characteristics, risks, and related market factors, and to reasonably allocate assets according to individual risk tolerance.