Bitcoin Doesn't Trade on Fundamentals, but Supply and Demand

The previous point was made in a recent column meant to explain the surging value of the most prominent crypto concept.

Bitcoin investors are expecting the U.S. Securities And Exchange Commission (SEC) to issue a decision soon on whether to grant Bitcoin "exchange-traded fund" (ETF) approval, which would allow people to invest in Bitcoin without having to buy it on a crypto exchange like Coinbase or Binance.

The price of Bitcoin has risen in anticipation of such approval. But why is the price of the most prominent cryptocurrency rising so much? According to one popular explanation, it's because the coin doesn't trade on fundamentals, but instead on supply and demand.

One investor who's made millions on bitcoin was recently asked by a journalist why he put money into it, and his response was that “It’s the only commodity in history that doesn’t have a supply response to rising prices.”

But as Giedre Valaviciute points out in a recent column, this explanation doesn't square with the coin's price history, which has seen plenty of bear markets.

If a limited supply is really what makes bitcoin such a great investment, then why all the stretches when the price of the coin was in decline?

“Bitcoin doesn't trade on fundamentals. It trades on supply and demand. Period. Full stop. Don't overcomplicate it,” Valaviciute writes, summarizing the perspective of bitcoin investors.

But if bitcoin doesn't trade on fundamentals, then what are those who own the coins speculating on?

There's nothing more to it than a speculation, which is all that bitcoin investors own. What do they think they own, exactly?

Some will no doubt repeat once again that they own something that is finite in supply, and that the limit in supply means they own something that can only go up.

Ok, but if so, what do they really own? Think about it.

And in thinking about it, it should be said with certitude that those who feel fortunate enough to own bitcoin (and surely many feel this way) don't really own money or a coin.

Money's worth is in what it can buy, but bitcoin owners logically wouldn't use it to buy things.

Evidence supporting the above claim can be found in the stated belief by bitcoin owners and commentators that the so-called coin doesn't trade on fundamentals, but instead supply and demand such that it can only become more valuable.

But if the value of the coin is only going up, then it's not money. Really, who would buy with a monetary medium that, once exchanged for fiat money, market goods or both, will soon enough be worth much more than it was when used to make the purchase of fiat money, market goods, or both?

To which some might say that demand for that which is finite won't always remain constant such that there will be bitcoin bear markets too.

Ok, but isn't the point of bitcoin that it doesn't trade on fundamentals, but instead supply and demand?

Based on that, what are the “non-fundamentals” that would cause bitcoin to decline in value?

And if a coin that doesn't trade on fundamentals is in decline, who might exchange money, market goods or both for that which is in slow or rapid decline?

It brings to mind the individual (no doubt one of many) who made millions on BTC, and his point that bitcoin is “the only commodity in history that doesn't have a supply response to rising prices.”

Well, that's true. But is there a supply response to falling prices?

One guesses falling prices might attract sellers, but to be fair, falling prices would no doubt attract some buyers eager to get what's limited in supply at a lower price.

Except that it remains unexplained what buyers are getting assuming they buy at falling prices.

Without fundamentals at work, and with limited supply supposedly what imbues bitcoin owners with gold-plated insurance against price declines (where have you heard that one before?), it seems buyers and owners are getting a speculation based on nothing, one that if it lives up to its billing will never be an exchange medium as much as it will remain a speculation that there will always be buyers of what's limited in supply.

Which is all well and good. Live and let live, as they say. Would it be that we'd all bought bitcoin in the early days, during a bear market, or both.

Still, it's worth pointing out that fundamentals are at work with bitcoin, and they're rooted in the hope that there will always be a market for something limited in supply, and that for being limited in supply, can't ever fulfill the purpose of money; money being money for what it commands in the marketplace.

The problem is that bitcoin isn't money, and we know it's not because its owners tell us it's not