Perhaps this question worries many. Someone is waiting for the fall to buy bitcoins, and someone is closely following the market fluctuations and is already making money on it.
Bitcoin naturally does not have a stable exchange rate, but at the same time, it still has a mechanism for working. It’s not random. Let’s analyze how it works and make predictions.
Do you know how does the Bitcoin exchange work?
Bitcoin is designed to facilitate peer-to-peer exchange, much like cash, but in the digital realm. This means that you can exchange bitcoins for anything you want, and you can do it without intermediaries such as banks or payment apps. For example, if someone paints your house, you could potentially agree to send them an agreed amount of bitcoins as payment. Essentially, this would be no different from handing over cash for the house painting services.
And vice versa, if you want to buy bitcoins, you can offer the seller an agreed amount of cash (or any other goods or services) in exchange for an agreed quantity of bitcoins.
Of course, since most people do not use bitcoins in their everyday life (at least, not yet!), it is usually more challenging to find sellers and buyers for peer-to-peer transactions compared to, for example, trading in the local currency. This brings us to the concept of “liquidity.”
What is liquidity?
Liquidity refers to the ease with which you can buy and sell an asset, and it largely depends on the number of buyers and sellers (market participants) for that asset. Cash is typically considered the most liquid asset as it is widely accepted almost everywhere; cash can be easily exchanged for almost anything. On the other hand, an automobile is generally considered less liquid than cash because it requires more effort to find a buyer. A high-end collectible car would be considered even less liquid as the pool of potential buyers is smaller.
Bitcoin is the most liquid among all cryptocurrencies due to its large number of market participants. Its daily trading volume is measured in tens of billions of dollars! However, compared to cash, it is still relatively illiquid, at least for everyday use. This is why there is a need for Bitcoin exchanges.
What is a Bitcoin exchange?
A Bitcoin exchange is any service that matches Bitcoin buyers with sellers. It is the exchanges that make Bitcoin a liquid asset for large-scale traders.
When people mention Bitcoin exchanges, most often they refer to centralized custodial platforms like Coinbase, Kraken, and Binance. These platforms provide a marketplace for trading Bitcoin and various other cryptocurrencies. Similar to stock trading platforms like Robinhood and Charles Schwab, exchanges match buyers and sellers.
It is crucial to mention that, by definition, a centralized cryptocurrency exchange takes custody of your bitcoins. This has several implications, not only related to security but also to the freedom of using your bitcoins as you see fit.
How do centralized Bitcoin exchanges work?
From a user’s perspective, a typical scenario for using an exchange is as follows:
1. Register on the exchange and provide identity verification documents.
2. Deposit bitcoins, other cryptocurrencies, or in some cases, local currency into your newly created account.
3. Make a trade by creating a “buy order.”
Buy and sell orders are aggregated in an “order book,” maintained by the exchange to efficiently match buyers and sellers. Most exchanges allow users to place both “market” and “limit” buy orders. With a market buy order, you only need to specify how many bitcoins you want to buy (without setting a price). The exchange automatically matches you with a seller (or multiple sellers) offering the lowest price and executes the trade instantly.
Market orders are usually executed immediately, meaning you will receive your bitcoins into your wallet/account on the exchange right away. When creating a limit buy order, you specify how many bitcoins you want to buy and the price you are willing to pay. If and when sellers appear willing to sell at your set price (your “limit”), your order will be executed, and bitcoins will be credited to your wallet on the exchange while your funds (or other cryptocurrencies) will be debited.
What is a banking exchange?
Cryptocurrency exchanges that allow depositing and withdrawing local currency are referred to as “banking exchanges.” Some exchanges allow depositing local currency into the exchange account for making purchases (usually using a credit card or payment app like PayPal), but they do not allow withdrawing local currency back to a credit card or payment app. These exchanges are called “partially banking” exchanges.
Who are makers and takers?
In general, the more users an exchange has, the deeper the market it can provide. Market depth refers to the size of the exchange’s order book, which affects liquidity. People who place buy and sell orders on exchanges are called market makers. The larger the number of orders in the book, the easier it is for people to buy and sell large amounts of bitcoins at a price close to the global market rate. Takers, on the other hand, reduce liquidity by accepting orders already placed in the order book. When you place a market order, you become a taker. You can also be considered a taker if you place a limit order that matches an existing order in the book.
How do centralized Bitcoin exchanges make money?
In one word: fees. These can be some or all of the following types of fees:
1. Withdrawal fees: Most exchanges charge a fee for withdrawing bitcoins, other cryptocurrencies, or local currency. In most cases, the fee is fixed and charged per withdrawal (not as a percentage of the withdrawal amount). Withdrawal fees charged by exchanges often change, and they are often subject to change without prior notice.
2. Trading fees: These usually constitute a percentage of the trade amount and often depend on whether you are a maker or a taker (as mentioned above). In most cases, makers pay lower fees than takers. The reason is that makers provide liquidity (and are thus eligible for discounts), while takers reduce liquidity (and are thus subject to additional fees).
3. Interest/borrowing/liquidation fees: Some exchanges offer margin trading, where you can borrow funds to increase your position, creating leverage. Exchanges with margin trading typically charge additional fees based on the loan amount and the interest rate determined by the overall pool of funds available to all traders. There may also be an additional fee charged from your account when your position is liquidated.
Why do I need to verify my identity to use a centralized Bitcoin exchange?
Accepting clients to hold Bitcoin and other cryptocurrencies on a centralized exchange carries legal implications. Such exchanges are subject to the regulations of financial institutions involved in money transfers, within the jurisdiction they are registered.
For this reason, most centralized cryptocurrency exchanges require registration and identity verification from users. Regulatory bodies impose these requirements on exchanges to prevent money laundering, terrorism financing, and tax evasion. Authorities may also request exchanges to provide customer information, including trading history, upon request.
In many cases, you may be able to start using the exchange with just email verification. However, it’s important to note that this “simplified verification” typically comes with significant limitations, including restricted purchase amounts, withdrawal limits, and sometimes a complete ban on withdrawals. Before depositing Bitcoin or any other cryptocurrency into a cryptocurrency exchange, ensure that you have access to withdraw funds.
The next level of verification usually requires uploading a government-issued identification document such as a passport or driver’s license. Sometimes, you may be asked to upload a photo of yourself holding your identification document next to a piece of paper with the current date and a message requested by the exchange.
Please note that many exchanges do not provide access to individuals from specific nationalities.
How does a peer-to-peer Bitcoin exchange work?
There are now platforms that (1) help Bitcoin buyers and sellers find each other and (2) provide a venue for conducting transactions (usually with conditional escrow) without actually holding traders’ bitcoins. These are called peer-to-peer Bitcoin exchange platforms.
Peer-to-peer platforms can be an effective way to buy and sell bitcoins, but since you must personally negotiate the deals, they come with some inconveniences. Buyers may face difficulties in quickly acquiring the desired amount of bitcoins at competitive market prices.
Meanwhile, sellers may encounter legal consequences based on their jurisdiction and the volume of bitcoins involved. Taken together, these factors make most peer-to-peer Bitcoin exchange platforms significantly less liquid than most centralized custodial cryptocurrency exchanges.
What affects the price of Bitcoin
Bitcoin is the flagship of the cryptocurrency industry. It occupies about 51% of the cryptocurrency market.
But in the scale of the financial market, BTC doesn’t weigh that much. The total cryptocurrency market capitalization is $1.1 trillion. This is much smaller than the market capitalization of Bank of America ($9.5 trillion) and almost equal to Alphabet Inc. ($1.3 trillion). The market capitalization of Bitcoin ($587 billion) is slightly larger than that of Tesla ($585 billion), but slightly smaller than that of NVIDIA ($673 billion).
Understanding the scale of BTC is important to assess its potential price movements. The small size of the asset makes it dependent on larger market participants, and conversely, the larger the asset, the less it depends on others.
Stock market
To evaluate Bitcoin’s correlation with the global market, one can use a correlation chart between Bitcoin and the S&P 500 stock index. The S&P 500 shows changes in the value of stocks of the 500 largest companies traded in America – it is used to measure the health of the stock market.
The unit on the left side of the chart represents complete correlation between Bitcoin and the S&P 500, while zero indicates complete decoupling. In February 2023, the correlation was almost absolute. However, as of June 2023, there has been a slight decoupling observed.
It appears that Bitcoin often follows the movements of the stock market. Therefore, the state of the stock market is an important factor that will help us make a BTC forecast for the end of the year.
In June 2023, the US Federal Reserve (Fed) did not raise interest rates for the first time in a year. Prior to this, the regulator had been consistently raising rates to combat inflation, which had increased due to geopolitical tensions.
Raising the Fed’s interest rate increases the cost of dollars in the system, which in turn raises the cost of credit and slows down economic growth. Changes can be clearly seen by comparing the charts of the interest rate and the S&P 500:
📉 When the Fed’s interest rate was significantly increased, the S&P 500 declined.
📊 When the pace of interest rate hikes slowed down, the index stopped declining and entered a sideways movement (meaning it did not change significantly in value).
📈 When interest rate hikes were halted, the S&P 500 started to rise.
Federal Reserve Chairman Jerome Powell is considering raising the interest rate two more times in 2023. For the stock market, which has been under pressure for a year, these two additional rate increases are unlikely to be a tragedy. Therefore, we can forecast further strengthening of the stock market and, consequently, growth in Bitcoin, which tends to follow the movements of the stock market.
Regulation:
In 2023, the U.S. Securities and Exchange Commission (SEC) launched a “crusade” against the cryptocurrency industry. The regulator filed lawsuits against two major exchanges – Binance and Coinbase, and accused more than 60 cryptocurrency issuers of illegally issuing securities in the form of digital tokens.
👍 Good news – SEC doesn’t seem to consider Bitcoin a security.
👎 Bad news – The Commission is likely to continue exerting pressure on the cryptocurrency industry, which could lead to sell-offs that may also impact BTC.
Bitcoin ETF:
In June 2023, the cryptocurrency community started discussing the possibility of launching an Exchange Traded Fund (ETF) based on Bitcoin in the U.S. An ETF is an investment fund that allows investors to profit from the price movements of Bitcoin. This instrument simplifies the access of institutional investors (entities such as investment funds, banks, insurance companies) to the cryptocurrency market. The logic is that while the legality of cryptocurrencies may be uncertain, investing in an ETF is fully legal, making it a preferable option for larger players.
The discussion about ETF gained momentum after the investment giant BlackRock filed an application to launch a Bitcoin trust on June 16. A Bitcoin trust differs from a Bitcoin ETF in that it doesn’t allow for the redemption of cryptocurrencies; investors can only redeem the trust’s shares. Some market participants who consider buying actual Bitcoin in the future may not find these conditions appealing. Nevertheless, on the news of the BlackRock Bitcoin trust, BTC’s price surged to $30,000.
Euphoria:
When significant positive news for Bitcoin emerges (such as ETF approval), the cryptocurrency can experience an active growth phase (bull run). Greedy investors may “pump” the market in pursuit of profits, driving Bitcoin to new local highs, such as $35,000, $40,000, or even $45,000. If a correction follows an active growth phase and occurs in December, when the market hasn’t had time to “cool down” after the positive movement, BTC could end up being more expensive than anticipated in a scenario without a bull run.
It is nearly impossible to predict growth based on news, but this factor should also be taken into account.
Halving:
Approximately every four years (every 210,000 mined blocks in the Bitcoin blockchain), the Bitcoin network undergoes a halving, where the mining rate is reduced by half. Historical observations show that halvings tend to provoke Bitcoin’s growth. Here’s how it works:
🌟 Bitcoin’s emission is limited. Only 21 million coins will ever be issued, and currently, around 19.4 million have been mined. Halving cuts the influx of new Bitcoin into the market by half, but it doesn’t affect the demand for the cryptocurrency.
🪙 Bitcoin’s deflationary nature sets it apart from traditional money, the issuance of which is controlled by authorities. Regulators can print as much traditional money as they want, flooding the market with new banknotes and reducing their value through increased supply. Bitcoin’s emission cannot be increased, making it a valuable asset.
📈 Bitcoin has already undergone three halvings in its history, each of which ended with BTC’s growth and the setting of a new all-time high for the cryptocurrency’s value.
🗓 The next halving is expected in spring 2024 (likely in April) – four months after December 2023. Typically, four months before a halving, BTC is preparing for growth and often moves sideways with a positive bias (with no significant changes in price, experiencing periodic small surges).
“A rainbow chart of Bitcoin. Vertical lines represent halvings, and the black curve shows the behavior of the cryptocurrency’s price. Typically, Bitcoin experiences a halving in the ‘blue zone.’
What will be the price of Bitcoin at the end of December 2023?
The prospects of a positive trend in the stock market, the approaching halving, and the possibility of launching a spot Bitcoin ETF in the USA indicate the likelihood of a recovery in BTC’s price by the end of the year. However, regulatory pressure on the crypto industry and the historical behavior of cryptocurrencies in previous Decembers suggest that we cannot expect a rapid surge.
If we project the behavior of Bitcoin four months before previous halvings onto the realities of December 2023, we can assume that BTC will be in the range of $30,000 to $35,000 by New Year’s.
🤔 What do you think, at what price point will Bitcoin greet the year 2024?”
