Supply & Demand, Mining, Regulations… What are the Factors that determine the price of Bitcoin?
The basic fact about currencies is that they possess six key attributes — scarcity, divisibility, utility, transportability, durability, and counterfeit ability.
As the first of its kind, Bitcoin has value because it holds up well when these characteristics are analyzed; its biggest issue is its status as a unit of exchange as most businesses have yet to accept it as payment.
What determines Bitcoin’s price?
Bitcoin is a cryptocurrency developed in 2009 by Satoshi Nakamoto, which is the name that the still unknown creator signed as in the Whitepaper. Unlike traditional currencies, Bitcoin is not issued by a central bank or backed by a government; it is decentralized and operates through a revolutionary decentralized technology called blockchain.
The following are some of the main factors that influence the price of Bitcoin:
- Supply and demand
- The cost of mining
- The number of competing cryptocurrencies
- Regulations governing its sale
- Competition from other cryptocurrencies
- Its internal governance
Why is the Bitcoin price volatile?
Bitcoin has the highest trading volume among cryptocurrencies. However, in comparison to global markets, much less money is still involved. This means that prices have the potential to go up and down more quickly.
According to the Bitpanda guide:
“News events that are detrimental or beneficial to the reputation of Bitcoin, uncertainty in the future intrinsic value of the cryptocurrency as a store of value, currency risks for large holders of Bitcoin regarding liquidation as well as security breaches may also influence the Bitcoin price”.
An example of this could be seen recently, when Elon Musk tweeted that Bitcoin is environmentally unsustainable. The Tesla CEO said in a tweet that “he worries about the massive use of coal and other carbon-intensive energy to generate electricity needed to mine digital currency”. On another occasion, he implied in a Twitter exchange that the electric vehicle maker sold or may sell the rest of its bitcoin holdings, sending the price of the cryptocurrency down. Bitcoin dipped by 8% at that time.
Factors that affect the price of Bitcoin
The Bitcoin market is heavily influenced by regulation. As China accounts for nearly 70 percent of the world’s cryptocurrency mining, every legal change in China affects the price of Bitcoin.
In May, as the Forbes reported, the Financial Stability Development Committee of the State Council in China led by vice premier Liu He announced a crackdown targeting virtual currency mining, “leading to ripple effects in the whole crypto market with Bitcoin falling by nearly 50 per cent from it’s all-time high, and by as much as 17 per cent on Sunday”.
Now that the Chinese investors try to bypass regulatory oversight by taking bets on domestic and foreign over-the-counter (OTC) desks, the price of Bitcoin seems to be recovering.
OTC trading desks and P2P trading platforms such as Localbitcoins, Paxful, and a host of others have made life easier for bitcoin traders across the globe, especially in regions where the government has banned crypto trading.
While Bitcoin was the first cryptocurrency to gather mass attention, and the biggest cryptocurrency on the market currently, it has contenders. Altcoins including Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT) are among its closest competitors as of now. According to some experts, the Digital Dollar could be a competition to Bitcoin in the future, thus affecting its price.
“I would like to think that [bitcoin and libra] are also in competition with the central bank digital currency,” said the former International Monetary Fund’s chief economist.
“Central bank digital currencies, sometimes referred to as CBDCs, are expected to work just like regular coins and notes issued by central banks but exist entirely online, with the U.S. Federal Reserve potentially issuing digital dollars via Fed accounts”.
This is determined by how much Bitcoin is for sale on the market. 18.6 million Bitcoins are currently in circulation, but many of these have been lost. According to the cryptocurrency data firm Chainalysis, “about 20% of all Citcoins (around 3.7 million) have been lost”. This number is determined by bitcoin that hasn’t moved wallets in 5 years or longer.
4. Electricity costs
The simple fact is that if the price of electricity is low, then miners can profit more from Bitcoin. Several recent reports have suggested that the electricity consumption of Bitcoin is extensive; a Bitcoin country would rank 64th in the world for overall energy usage.
Energy accounts for between 90% to 95% of Bitcoin mining costs and is important in terms of whether it is profitable for miners to mine.
Governance has been a big issue in Bitcoin. As Bitcoin is not governed by a central authority, but by all computers connected to the blockchain, it is developed as a decentralized system. That means that it relies on developers and miners to process transactions and keep the blockchain secure. Software changes are consensus-driven, which tends to frustrate the bitcoin community, as fundamental issues typically take a long time to resolve. Some of the examples are the way forks are managed by the community, with detractors and supporters lobbying for their own way of diverging the Bitcoin blockchain.
Another governance issue born from the decentralization is what Investopedia explained as the issue of scalability. This refers to the number of transactions that can be processed in the blockchain, which depends on the size of blocks. As of now, bitcoin software is only able to process approximately three transactions per second. While this wasn’t a concern when there was little demand for cryptocurrencies, many worry that slow transaction speeds will push investors towards competitive cryptocurrencies.
As Bitcoin price is volatile and depends on many factors, all investors should analyze them well before making transactions involving the digital currency. While it is impossible to tell for sure which way the price is going to move, major events such as regulatory crackdowns or bad press for Bitcoin can be an indicator of that.
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