When considering whether to invest in Bitcoin or not many questions come to mind. An important question is how Bitcoin’s price is influenced. Knowing the answer to this can be very important as it can help you calculate the risk and reward you may acquire from investing. This article will list all the factors that can change the price of Bitcoin and explain how it was valued in the first place.
How is Bitcoin Valued?
The market factors such as supply and demand affect the price of bitcoin. When there are more sellers, the price normally drops, and the other way around. In comparison with physical currencies like the dollar, pound, euro, and yen, bitcoin (BTC) is a digital coin that is not distributed by any government or legal entity. A distributed network of users and cryptographic protocols are needed to generate, store, and move bitcoins.
Investors should do their business directly rather than through a middleman. Peer-to-peer networks eliminate trade barriers and streamline business. The first cryptocurrency in the world was suggested by Satoshi Nakamoto in 2008 and released in January 2009.
Every day, more companies adopt Bitcoin, giving it a genuine market worth. However, security concerns and volatility have seriously hurt this virtual fund. Even during the peak of its success, it was difficult to locate clear responses to frequently asked issues, such as how much is a bitcoin worth, who decides its price, and if it has any inherent value.
Supply and demand, which determine the price of other products and services, also determine the value of Bitcoin. If there are greater numbers of buyers than sellers or the reverse, prices will likely increase. It is also crucial to remember that neither a single company nor a single area can control the price of Bitcoin, nor can it be exchanged there. Each market or exchange establishes its price according to supply and demand.
Why is Bitcoin’s Price Volatile?
Bitcoin is a very volatile asset since its underlying worth and future value are unknown. Since there are only so many Bitcoins in existence, a diminishing number of new BTCs are produced every day. The demand must increase at the same rate as inflation to keep prices stable. Considering how tiny the Bitcoin market is in comparison to other sectors, news coverage alone has the power to influence price movements.
Similar to how a tweet stating that the Bitcoin blockchain had been suspended will lower its value, Bitcoin trading volume will afterward follow. So, can the price of Bitcoin reach zero given its tremendous volatility? It is technically feasible. For instance, the price of Bitcoin is prone to value collapses since it is not linked to any fiat currency, such as the dollar, or an additional real-world asset. We have seen, nevertheless, that algorithmic stablecoin such as Terra USD may also agitate the market.
However, for such a disastrous happening to occur in the case of Bitcoin, several warning signs, such as a protracted bullish market, will emerge beforehand to give investors a chance to preserve their capital. Additionally, the complicated Bitcoin architecture is difficult to undermine, but problems with scalability might jeopardize the future of the technology. However, that does not imply that the price of Bitcoin would overnight drop to $0.
Key Factors Impacting Bitcoin’s Price
Production Cost
Similar to other assets, manufacturing costs are a major factor in setting the price of Bitcoin. Research suggests that the price of bitcoin in cryptocurrency marketplaces is strongly correlated with the marginal cost of production.
The production cost for Bitcoin is essentially the sum of the direct fixed expenses for the infrastructure and power needed for mining the cryptocurrency plus an indirect cost associated with the algorithm’s degree of difficulty. A network of miners competes to decode an encrypted number to mine bitcoins. The first miner to accomplish so receives a reward of newly created bitcoins as well as any transaction fees earned since the previous block was located.
It takes a lot of computing power to use brute force to solve the hash to unlock a block and receive a reward. The miners will have to spend a lot of capital on several pricey mining equipment. Additionally, the Bitcoin mining process uses a lot of power. According to estimates, the Bitcoin mining network consumes more power than certain small nations.
Supply and Demand
Supply and demand are what decide how much a cryptocurrency is worth. When supply can’t keep up with growing demand, prices go up. For instance, there are only 21 million Bitcoins in existence at any given time. Others, like Ethereum, don’t have a supply limit. Some governing teams control the whole quantity of their cryptocurrency, therefore they can choose to control the capital supply by either issuing additional tokens to the general public or by burning them.
To prevent the circulating supply from increasing too big, several cryptocurrencies allow users to “burn” current tokens by sending them to an unrecoverable address within the blockchain. Demand may also rise when a currency’s popularity or usefulness rises, particularly if it starts to be considered an investment.
Competition and it’s Impacts on Bitcoin’s Price
Even though Bitcoin is the oldest and most recognized cryptocurrency, there are a lot of other tokens competing for capital. Bitcoin controlled the majority of cryptocurrency marketplaces. But with time, its power has diminished. Over 80% of the total market capitalization of cryptocurrencies in 2017 was made up of Bitcoin. That proportion fell to less than 50% by 2022.
At least 13,000 various kinds of cryptocurrencies exist, and new ones are continually being introduced. Despite being simple to create, they are challenging to sustain since a network of users for that coin must be established. If the blockchain has a purpose for the means, it can swiftly grow a network, specifically when it overcomes a competitor’s drawback. The value of an existing rival will decrease if a new rival gains traction, while the value of the new currency will increase.
Regulations and the Impact on Bitcoin’s Price
After a financial crisis brought on by weak restrictions in the commodities market, bitcoin was introduced. The ecosystem of cryptocurrencies is known for being devoid of restrictions and borders because it has remained uncontrolled.
The deregulation of Bitcoin has both advantages and disadvantages. It may be used freely over borders and is not subject to the same governmental constraints as other currencies because there are no regulations. Despite this, governments and other interested parties continue to press for cryptocurrency regulation.
The restriction of Bitcoin trading and transactions in September 2021 in China made an impact on the supply and demand of Bitcoin. China’s mining operations were compelled to leave and relocate to nations that support cryptocurrencies. Prices dropped from approximately $51,000 at the start of September to roughly $41,000 by the end of the month, but they immediately rose back to their prior levels as trades started up again.
The Impact of Media on Bitcoin’s Price
The media and news coverage affect Bitcoin’s price in both positive and negative ways while attempting to enlighten investors and other interested parties. Any modifications to any of the previously covered criteria are immediately publicized and made widely available to the public. Therefore, positive news for cryptocurrency investors is likely to increase Bitcoin’s price while negative news tends to decrease it.
One of the most important elements influencing cryptocurrency prices is investor sentiment, which is influenced by a mix of supply, demand, manufacturing costs, competition, regulatory changes, and the ensuing media attention.
Conclusion
Many different factors affect Bitcoin’s price. Supply and demand, which determine the price of other products and services, also determine the value of Bitcoin. Production cost also plays an important role in valuing Bitcoin price. However, the market’s enormous variety of currencies can influence how much they affect one another in price. The fact that Bitcoin and other cryptocurrencies are unregulated can cause the price to fluctuate a lot. Even how the media portrays Bitcoin can either scare or attract investors which can drive the price up or down
