David Edwards
Bitcoin (BTC) is a cryptocurrency that Satoshi Nakamoto, its unidentified creator, created in 2009. A blockchain keeps track of all transactions, displaying each unit’s transaction history and demonstrating ownership. Bitcoin is not backed by a government or issued by a central bank like conventional currencies are. Because Bitcoin is not a corporation, investing in it differs from investing in stocks or bonds. As a result, there are no corporate balance sheets, Form 10-Ks, fund results, or other conventional tools for selecting an investment to analyze. Learn about the factors that influence the price of bitcoin to justify better your decision to invest in it.
What determines the BTC price?
The monetary policy instruments, inflation rates, and economic growth measurements that generally affect the value of a currency do not apply to Bitcoin because it is neither issued by a central bank nor backed by a government. Bitcoin acts as more of a commodity being used to store value, so the following factors influence its price:
- The supply of Bitcoin and the market’s demand for it
- News and media
- The number of cryptocurrencies in circulation
- Regulations governing its sale and use
- The cost of producing a bitcoin through the mining process
Effects of supply on the price of Bitcoin
The supply of an asset is a key factor in setting its price. An asset in high demand is more likely to have high pricing than one in a large supply, which will have low prices. Since there will only be 21 million manufactured and only a certain number made year, the supply of Bitcoin is typically well publicized. Its protocol only permits the creation of new Bitcoin at a fixed rate, which is intended to decrease over time.
Bitcoin’s future supply is, therefore, dwindling, which adds to demand. This is similar to a reduction in corn supply if harvests were to be reduced every four years until no more was harvested, and it was publicly advertised that this would happen—corn prices would skyrocket.
Bitcoin’s demand and price
Both regular people and big investors are starting to like bitcoin more because it’s getting a lot of attention in the news, from people who give investment advice, and from business owners who say bitcoin is valuable now and will be in the future. Countries like Venezuela, where money is losing its value fast, also like bitcoin a lot. People who need to move large amounts of money secretly or for illegal reasons also prefer it. This means that more people want bitcoin, but there won’t be as much available in the future, which has made its price go up. However, the price of bitcoin still goes up and down a lot. For example, in 2017, its price went up a lot, then it fell and stayed low for a while, and then in 2021, it quickly went up and down again.
Production costs and Bitcoin price
Similar to other commodities, production costs are a major factor in setting the price of bitcoin. Research suggests that the price of bitcoin in cryptocurrency marketplaces is closely correlated with its marginal cost of production.
The production cost for Bitcoin is essentially the sum of the direct fixed expenses for the infrastructure and electricity needed to mine the cryptocurrency and an indirect cost associated with the algorithm’s degree of difficulty. A network of miners competes to decipher an encrypted number in order 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 last block was located.
It takes a lot of processing power to use brute force to solve the hash in order to unlock a block and receive a reward. The miner will have to spend a lot of money on numerous pricey mining equipment. Also, the bitcoin mining process uses a lot of electricity. According to estimates, the bitcoin mining network consumes more electricity than certain small nations.
The number of cryptocurrencies in circulation
Despite the fact that Bitcoin is the most well-known cryptocurrency, there are hundreds of other tokens competing for capital. By 2022, Bitcoin will control the majority of cryptocurrency marketplaces.
But with time, its power has diminished. Almost 80% of the total market capitalization of cryptocurrencies in 2017 was made up of Bitcoin. The proportion fell to less than 50% by 2022.
The fundamental cause of this was growing acceptance of alternative currency and their potential. For instance, due to a rise in decentralized finance, Ethereum has become a fierce rival to Bitcoin (DeFi). Ether (ETH), the cryptocurrency that serves as “gas” for transactions on its network, has attracted investment from investors who see its potential for redesigning the rails of contemporary financial infrastructure.
The popularity of other cryptocurrencies has increased as they are continually being introduced. Other coins like Tether, Ethereum, BNB, USDCoin, and Solana are reducing the market share of Bitcoin. Competition has drawn investors to Bitcoin even as they have taken some of their dollars from the ecosystem. As a result, there is now more demand for and knowledge about cryptocurrencies. Bitcoin has profited from the attention as a type of standard-bearer for the cryptocurrency ecosystem, and its prices have stayed high.
Regulations and price of Bitcoin
Bitcoin came out after a financial crisis caused by weak rules in the trading of complex financial products. The world of cryptocurrencies is known for not having many rules and being open across countries because it’s not regulated yet.
The fact that Bitcoin doesn’t have strict rules has its good and bad sides. It can be used anywhere in the world without the usual government restrictions. However, governments and other groups are still trying to figure out how to regulate cryptocurrencies.
There’s a chance that new rules are coming, but it’s not clear how they will affect Bitcoin’s price. For example, decisions by the U.S. Securities and Exchange Commission (SEC) can influence Bitcoin’s value. When the SEC approved the first U.S. bitcoin-related ETF, Bitcoin’s price shot up to $69,000 in October 2021. But a few months later, its price dropped to around $40,000.
China’s ban on Bitcoin trading and mining in September 2021 also affected Bitcoin. It led to a decrease in its supply and demand. Prices fell from about $51,000 at the beginning of September to around $41,000 by the end of the month. However, prices went back up as the mining operations moved to more crypto-friendly countries and got back to business.
How the media and news affect the price of Bitcoin
News about Bitcoin can make its price go up or down, as it tries to keep investors and others interested. When anything changes with things that affect Bitcoin’s price, the news spreads fast. So, good news usually makes Bitcoin’s price go up, and bad news can make it go down.
One big thing that changes cryptocurrency prices is how investors feel about it. This feeling is shaped by how much Bitcoin is available, how much people want it, how much it costs to make it, what other cryptocurrencies are doing, new rules, and what the news says about all of this.
