You will be able to explain what drives bitcoin's price and why it can move sharply in either direction.
Darren's group chat has two moods. In one week it is screenshots of bitcoin at a new high and someone asking whether it is too late to get in. A few months later the same chat is quiet, apart from one person posting a chart that has fallen by half. Nothing about the ledger changed between those two weeks. The price did, and this lesson is about why it moves so much.
The bitcoin protocol sets a hard limit of 21 million coins. New coins enter only as the reward miners earn for adding blocks, which you met in lesson 1.1, Bitcoin is a shared ledger that nobody runs. That reward is cut in half every 210,000 blocks, which works out to roughly every four years, an event people call the halving. So new supply was large in the early years and keeps shrinking until, far in the future, no new coins are created at all.
This is the part of the story that is fixed. Anyone can read the schedule in the protocol and work out roughly how many coins will exist on a given date. Supply is not where the surprises come from.
Supply also only tells you how many coins there are. A rare thing is not automatically a valuable thing. Plenty of rare objects are worth very little because nobody wants them. Price needs demand.
When you value a share, you can at least start from the company's earnings and the dividends it may pay, and bonds and rental flats pay coupons and rent. Even when those payments are uncertain, they give buyers a rough sense of what the thing is worth, and they keep paying you while you wait.
Bitcoin pays nothing while you hold it. No interest, no dividends, no rent. Your return comes only from selling to someone later at a higher price than you paid. So the price rests entirely on how much people want to hold it, today and in the future, and on what they believe other people will want.
Supporters describe bitcoin as a store of value, something like digital gold, with a supply no government can increase. That is a real argument and some people hold it for exactly that reason. You can study the same idea with gold itself in lesson 6.1, What gold does and does not do, which also pays no income. The point for now is that a store of value is only worth what the next holder thinks it is worth. There is no earnings number to fall back on when the mood changes.
Since demand does all the work, it helps to know what shifts it. A few forces show up again and again.
Sentiment is the biggest. Rising prices draw in new buyers, and their buying pushes prices higher, until the flow of new money slows. Then the same process runs in reverse, with falling prices prompting selling.
Regulation moves demand in both directions. A country restricting exchanges can push prices down. Clearer rules or approvals that let more people buy through familiar channels can push them up.
Access matters too. When new products make it easier for large investors or ordinary brokerage customers to get exposure, more money can arrive quickly. And in several recent periods bitcoin has moved with the wider appetite for risk, so a bad month for shares has often been a bad month for bitcoin as well.
None of these can be measured precisely, and none of them gives you a number for what a bitcoin should cost, so anyone who tells you its fair value with confidence is guessing.
Because nothing anchors the price, falls of more than 50% from a peak have happened several times in bitcoin's history, and some lasted a year or more before the price recovered. Your activity for this lesson is to find them on a chart yourself, so the exact sizes and dates are left for you to look up.
It is worth doing the arithmetic on what a large fall means for you, because it is less forgiving than it looks. Take a made-up holding of S$2,000.
A 50% fall leaves you with S$1,000. To get back to S$2,000 the price now has to double, a rise of 100%.
A 75% fall leaves you with S$500. To get back to S$2,000 the price has to rise fourfold, which is a rise of 300%.
The deeper the fall, the larger the climb needed to recover. And recovery is not promised. Many other crypto tokens fell by similar amounts and never came back.
For Darren, this changes the question. "Will bitcoin go up?" has no answer anyone can give him. "Could I live with this S$2,000 being worth S$500 for two years, or worth nothing?" is a question only he can answer, and it is the one that matters. Module 8 turns it into a rule for how much any speculative asset may hold.
When you pull up a long-term price chart, switch it to a logarithmic scale if the site allows. On an ordinary scale, the early years look flat and recent moves look enormous. On a log scale, equal percentage moves take up equal space, so a 60% fall in an early year looks as big as a 60% fall last year. That is the fairer way to compare the falls you are about to mark, and to see how long each one took to recover.
Pull up a long-term bitcoin price chart and mark the three largest falls from a peak, with the approximate size and length of each.
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