About signal and noise: Why the bitcoin price is relevant
The Bitcoin price accounts for a large part of the public attention. Rightly so, because the price combines all available information on the market and gives an indication of the fundamental value of BTC.
The development of the Bitcoin price is already enormous. In the first two weeks of the new year alone, the price of the cryptocurrency rose by up to 40 percent above the closing level of the previous year. The current high for the year is 41,880 US dollars (USD).
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At BTC-ECHO, we also deal with the price trend on a daily basis in the market update. But why do we talk about price all the time?
In the interplay of supply and demand, the price plays a decisive role. One could say that the price of an asset reflects the essence of what the market considers to be an appropriate price. Expectations about future value, the availability of the asset, the news situation, the information available and the overall economic situation all play a role.
Markets then bring buyers and sellers together and where supply and demand meet, a price is created. So we can say that the price discovery mechanism is exactly what markets do: they give goods a fair price according to all available information in the market.
Price discovery and Bitcoin
So what is a fair value for Bitcoin? This is a question that every market participant would probably answer differently. For some, Bitcoin is a digital substitute for gold – and should therefore be worth at least as much.
This is exactly why markets are volatile. For one, BTC was clearly overvalued at USD 40,000, which is probably why people sold there. For the other, BTC is still fairly valued even at USD 100,000, so they will also buy at USD 40,000. If the majority of market participants conclude that the current level is too high, the price falls because more sell orders are placed than buy orders – and vice versa.
In the end, it comes down to what benefit the totality of market participants see in Bitcoin. And with a new asset (remember: Bitcoin is only twelve years old), the road to establishment can be bumpy. Looking at the volatility, one can only conclude that the market is having some difficulty developing a fair value for Bitcoin. In other words, market participants disagree about what Bitcoin actually is and how much the asset is ultimately worth.
But volatility is falling. While in past cycles price adjustments of 30-40 percent were the order of the day, volatility (shown here in red), measured by the standard deviation of the price, is about 19 percent these days.