In short, it’s driven by supply and demand.
I like this analogy to explain it simply.
Presume these 3 primitive scenarios:
- Scenario 1:
Supply meets demand (price doesn’t go up or down)
I have 10 apples priced at $1 each.
I should be able to make 10 bucks if I sell them to whatever amount of people that want to buy them from me.
There can’t be more than 10 of them, it also could be just one person that buys them all cos they were first to get to me or there could be a few of them getting various amounts of apples, but all in all, nobody wants to get more than 10 apples at this time.
I can’t raise the price, because they might not want to get any apples from me or I’d just sell a few and be left with some. I might try raising it and even get lucky, but it usually doesn’t work this way in the markets.
I don’t want to reduce the price either because I know that I’m selling all 10 apples, so it would be silly to cut my earnings.
The price therefore stays the same.
- Scenario 2:
Demand exceeds supply (price goes up)
Now, I again have 10 apples for sale, but there’s now 20 people that really want to buy them from me and they’re actually lining up in the queue to cough up the cash. Happy days!
The question is, why would I now sell at $1 an apple?
I’m gonna raise the price for each apple, because potentially and statistically, I’ve got 2 buyers for 1 apple. I could even try a greater multiplier than just 2x to see if they all sell.
Also, the odds are in my favor and give me assurance that I should be able to sell all the apples at the higher price even if there’s somebody that declines my new markup and perhaps others won’t.
The price automatically goes up, because the apples are in increased demand that exceeds the current supply, so whoever pays more and is the first to pay get to enjoy their apples that are more expensive.
Supply exceeds demand (price goes down)
Opposite to the above, if I have 10 apples but only 1 buyer that’s also hesitant to spend his whole $1 for one apple (because it looks like nobody else wants to buy it), I might have a difficult time to sell anything at this price.
I will try all of my sales and marketing techniques to push sell, but ultimately if it all of them fail, I will revert back to reducing the price for each apple.
Ideally, I want to sell all of them so I need to attract more buyers with a reduced cost, so I go down with the price per each apple.
Once the reduced price attracts big enough crowd that could potentially buy all apples from me (or even demand more than 10), I might then revise my pricing and get creative again.
No interest = supply > demand = the price goes down to a level that it becomes attractive to buyers.
That’s more or less how the supply and demand dynamics shift the price.
That’s also why you see different prices for bitcoin or any other asset at different exchanges (if we don’t count their fees and markup). They have their own number of sellers with X amount of assets for sale to accomodate the demand generated by the buyers and this drives the price north or south.
There’s much more to it, including how market crashes could be initiated by massive shortages of either demand or supply, but it should give you a basic idea how it works.
Hope it helps and good luck!