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
Retail and institutional investors have become interested in bitcoin, and demand is rising as a result of more media coverage, investment “experts,” and business owners praising the value that bitcoin has and will continue to have. Bitcoin has also gained popularity in nations like Venezuela that experience severe inflation and depreciating currencies. It is also well-liked by people who transfer big sums of money for nefarious and unlawful purposes.
This indicates that a combination of a gain in demand and a decrease in future supply has driven up the price of bitcoin. Yet, it still experiences boom and bust cycles in its price. For instance, the price of Bitcoin experienced a surge in 2017 that was followed by a protracted trough, two rapid spikes, and downticks through 2021.
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
After a financial crisis brought on by lax restrictions in the derivatives market, bitcoin was introduced. The ecosystem of cryptocurrencies is known for being devoid of restrictions and borders because it is still unregulated.
The deregulation of Bitcoin has both advantages and disadvantages. It can be used freely across borders and is not subject to the same governmental constraints as other currencies because there is no regulation. Governments and other interested parties are still pushing for cryptocurrency regulation, nevertheless.
The emergence of a regulatory framework is imminent, and it is unclear what impact it will have on the price of Bitcoin. For instance, cryptocurrency decisions made by the Securities and Exchange Commission (SEC) in the US may have an effect on the price of Bitcoin. A few weeks after the SEC approved the ProShares Bitcoin Strategy ETF, the first U.S. bitcoin-linked ETF, the price of Bitcoin soared to $69,000 in October 2021. (BITO). But a few months after it reached that level, the price of Bitcoin was circling about $40,000.
The September 2021 restriction on bitcoin trading and transactions in China has an impact on the supply and demand of the digital currency. China’s mining operations were compelled to leave and relocate to nations that support cryptocurrencies. Prices dropped from around $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 business picked up again.
How the media and news affect the price of Bitcoin
The media and news coverage affect Bitcoin’s price in both positive and negative ways while attempting to inform investors and other interested parties. Any modifications to any of the previously covered factors are immediately publicized and made widely available to the public. So, positive news for cryptocurrency investors tends 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 developments, and the ensuing media coverage.