So, what is price discovery? And what is Bitcoin’s fair market price and is now the time to invest in crypto?
What Is Price Discovery?
In its simplest form, price discovery refers to the act of determining the proper price of an asset. It’s the market pricing of an asset – how many people are willing to buy it for the current price, versus how many people want to sell it at the current price. The more buyers there are, the higher the price will go. If sellers decide they have enough profits, or they don’t anticipate more profits, they will sell – pushing the price down.
This constant back and forth between market participants is price discovery. It’s constantly happening regularly, but the term is often used at times of rapid price increases or decreases. But why?
Price Discovery and Supply and Demand
Price discovery is driven in part by supply and demand. The less of an asset there is, the more valuable it becomes as demand increases. This means sellers will be less willing to let go of their assets at a low price, while buyers will be more willing to pay a pretty penny in anticipation that the asset will continue to go up. How does this specifically relate to Bitcoin? Bitcoin is unique as far as supply is concerned. Other assets, like stocks, have a virtually infinite supply.
More stock can be issued at will, and stock splits can keep the number of shares increasing indefinitely. Because the supply of these types of assets is flexible, there will always be stock available for new buyers who want to own it.
Bitcoin, on the other hand, has a fixed supply; there can only ever be 21 million Bitcoins in existence. So, as more buyers enter the market, they will be increasingly reliant on a seller who is willing to part with their coins to own one. And likewise, as this demand makes it more likely for the price to increase, fewer sellers will be incentivized to sell before realizing their full profit potential.
What is Bitcoin’s Fair Price?
Because Bitcoin has such a limited supply, there isn’t enough for everyone in the world to own one.
There are 46.8 million millionaires in the world today. They represent a small portion of the population, but even if each one of them wanted to own just one Bitcoin, there wouldn’t be enough for that to happen.
Add in the rest of the world’s population – over 7 billion people, along with central banks that rely on trillions each year to function, and businesses that purchase millions of dollars of Bitcoin, and it becomes easy to imagine how Bitcoin’s limited supply is a driving factor in its recent price rise (see article: Bitcoin price predictions).
Price discovery is an important mechanism in all markets. It’s the highlight of Bitcoin news now because institutions and other buyers are waking up to the fact that there is a very limited supply of what may be the financial future, and the price is rising rapidly as a result. The financial system is changing, and the same is true for investments, savings, and the way we transact globally.
Ultimately, it could be a long time before Bitcoin’s price settles at what some could call its “fair” price – but $100,000 per coin, may just be the beginning.
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