Bitcoin Fundamentals – Supply and Demand, dissected

Originally published with Amber

Audio by @DelioPera

Often, you will hear from traders and others about the “fundamentals” of Bitcoin. That they look good or bad, or trending sideways, or some other comment. Most people don’t actually know what the fundamentals are, or what that means. Some even think that price action is a fundamental property of any asset, which it absolutely is not.

In my view,  the fundamentals of any asset is in its ability to do precisely what it is intended or designed to do, as well as in its success in doing so – intention and execution. For example, a business’s fundamentals refer to the features that will enable it to grow and generate an income over time.

For a commodity, like coal, oil, coffee, wheat, sugar, gold, and Bitcoin, the fundamentals are typically in things that cause people to want to acquire it, including the dynamics around its production – i.e., its demand, and its supply; both now and in the future.

For an emergent and evolving free and open market money – like Bitcoin – the fundamentals are the things that measure the probability of it successfully becoming universal money.

There are two main components of this:

  1. The Technical Aspects:
    • How good is Bitcoin at being money? 
    • How good is Bitcoin at resisting shut off?
    • Can it scale to become a reliable medium of exchange? 
    • Will it remain exchangeable and fungible? 
    • Are its qualities, characteristics and its subsequent layers able to solve the world’s problems with money? 
    • Is it Lindy and will it remain so?
  2. The Network of Users:
    • How many people are committed to Bitcoin? 
    • How many Bitcoin are there that will never be sold back to fiat currency; that is, sats that are waiting for sat/cent parity in a hyperbitcoinised world, so that they may start to be spent (this property is hard to measure; there is no chart that I know of showing this). 

We know, however, that once somebody is sufficiently captured by Bitcoin – that is, once they understand it is the solution to many of the troubles of our society and civilization, more generally, and that once they see that Bitcoin is virtually inevitable over a long enough time scale – then they are highly unlikely to spend a single sat, unless in exceptional circumstances, such as an emergency. 

This is a fundamental property (note: I am excluding people who simply hold some bitcoin without any particular conviction as this is not sufficient enough to be considered part of the “network” of users, in this context).

These are the fundamental properties of Bitcoin, which influence the true supply and demand of Bitcoin. Let me explain…


The supply of Bitcoin comes from:

1) New Coins: these are Bitcoin that are mined (by miners using ASIC computers) whereby the production is programmed at a predefined rate by the Bitcoin protocol. This is an incredibly unique property of Bitcoin. It is something that humanity has never seen before, where the total supply of the asset is identifiably known upfront, in advance, and that is independent and immutable of any single person’s decision. 

The new coin rate currently is 6.25 Bitcoin issued in the Block reward every 10 minutes (on average). 900 new Bitcoin are being issued onto the market every day. You can think of these coins as all being sold to the market – even if you know there are some coins not being sold by some miners; it will be clear soon why this is so.

2) Old Coins: Added to the supply of 900 bitcoin per day, are coins sold by loyal Bitcoiners (especially the ideologically committed ones), due to certain personal circumstances. Any Bitcoin sold by a trader or a non-committed individual holding Bitcoin is not counted as supply. This is because the Bitcoin they bought was never meant to be held on for too long. Their demand doesn’t count, so neither does their supply.

3) IOU Bitcoin: This is Bitcoin bought from an exchange that does not keep a 1:1 reserve. This inflates the true supply of Bitcoin, meaning customers may be buying Bitcoin that does not really exist. Or, they are buying Bitcoin that is claimed by more than one person. This has the effect of adding excess supply to the market, thus reducing the price.


Demand for Bitcoin is equivalent to the supply of USD. It’s worth pausing and thinking about this for a moment:

  • Someone selling Bitcoin is supplying Bitcoin, and thus demanding dollars. 
  • Someone buying Bitcoin is demanding Bitcoin, and thus supplying dollars.

The supply of Bitcoin always equals the supply of dollars at a given moment and results in a corresponding price. If 900 bitcoin are sold in a day, and 45,000,000 USD are sold, then the average weighted price for the day would be $50,000 USD per bitcoin.

Demand for Bitcoin comes from:

1) Bitcoiners selling dollars (for good) to receive Bitcoin in return. Bitcoin, which is destined to be HODL’d for a very long time. 

Note: Any portion of Bitcoin bought, but intended to be sold at a higher price, is not considered true Bitcoin demand. That is trading demand, which will be discussed later. Note also, that if the price is going up, and Bitcoiners as a whole are not increasing the amount of USD being ‘renounced’, then demand from Bitcoiners (for Bitcoin) actually falls. As the price goes up, new dollar supply must come in to maintain the higher price.

2) Miners not selling. A miner that produces Bitcoin is actually BUYING Bitcoin. Why? 

Because they pay for that Bitcoin with equipment and electricity and other mining overheads. There is an unforgeable costliness that is associated with mining Bitcoin. That cost, in USD, is a supply of USD, which takes Bitcoin off the market. It is some quantity of Bitcoin (coming from the 900 per day produced) that doesn’t get sold to the market – this is considered Bitcoin purchased from capital and electricity expenditure. 

Yes, it is below market price, and a purist might want to consider a modifying factor to account for this. However, there is no need here; I am simply providing an overall picture of how to think about Bitcoin supply and demand. You can now see why all mined Bitcoin must be considered as part of the supply side, in order that unsold mined-Bitcoin can be included on the demand side.

3) Traders not trading Bitcoin, but HODL’ing. A trader who buys Bitcoin with the intention of selling at a higher price may decide to keep a portion and never sell. Particularly, when the market turns down and they instead prefer to hold on to this, (in their terms) ‘bad investment’. At this point, they may begin learning what Bitcoin actually represents and suddenly become transformed into a dedicated Bitcoin HODLer.


Why is it that traders don’t contribute to Bitcoin’s supply or demand? Because, if we look across a long enough time period (longer than a typical trade) there is no net effect. 

For example, if I am a trader, and I buy 6.15 bitcoin in January and sell it in February at twice the price I bought it for, then, there has been no change to the supply of bitcoin to the market over that month. I would have contributed a little to the price going up when buying, and contributed to it going back down a similar amount when I sold. However, the net effect is that I contribute only noise, or rather some volatility in the price. But, no absolute change overall. 

I also took dollars out of the system, because I made a profit. How that contributes depends on who lost that money. If it was another trader, then there is no effect on Bitcoin’s overall supply and demand, because those dollars were not destined to buy Bitcoin for HODLing purposes. 

However, if a Bitcoiner who accumulates lost dollars, that would result in lower bitcoin demand (lower USD supply). Bitcoiners don’t have to be trading to lose dollars. With the higher price, their regular purchases would have netted them fewer bitcoin, and so the demand for Bitcoin would be reduced a little. 

Viewed as a whole, some traders make money while other traders lose money, and so there would be no significant dollar profit and loss to significantly impact Bitcoin supply and demand.


It is worth noting that any Bitcoin bought for HODLing may not contribute 100% to demand if it is kept on exchange. It is unknown just how much fractional reserve exchanges keep; it may not necessarily be one to one, in which case there is potential for an unknown and inflated supply of Bitcoin IOUs.

Futures markets

Any person that buys a futures contract for Bitcoin, settled in cash, is not demanding Bitcoin, and not contributing to the price increase of Bitcoin over the long term. Instead, they are acting as a trader and will only produce noise in the overall price action over the particular period that they are active within the trade.

Supplementary Notes on Price

What happens when supply is equal to demand? This results in a steady price over time. 

What if there is not enough supply? There is never “not enough supply”, simply because price adjusts until supply is sufficient. 

For example, if there is a shortage of Bitcoin at 50k, then the price will increase until people are incentivized enough to sell. There will come a point where no amount of USD will entice a single person to give up a single sat – at this point, the dollar would be considered dead and hyperbitcoinisation will have been reached. 🎉


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