7 factors that influence Bitcoin price
Since its creation by the anonymous Satoshi Nakamoto – either an individual or a group of developers – Bitcoin has been synonymous with cryptocurrency. Although there are several types of it available today, Bitcoin has the longest trading history. So, what are the factors that influence Bitcoin price?
Bitcoin price factors
The price of Bitcoin gradually grew from $0 to a fraction of a cent. Then the cryptocurrency experienced several dramatic peaks and falls. Considering that it has grown from $0,08 in 2010 to over $60,000 in 2021, Bitcoin attracts much interest from investors. The regular price bubbles indicate that this cryptocurrency has become a store of value for those who see its potential. Below we discuss what factors affect Bitcoin price.
Bitcoin is different from traditional currencies and stocks in that it is not backed by any government or banking scheme. It is immune to inflation, official monetary policies, and even general economic growth. However, since it began being traded at crypto exchanges, its price depended on two typical market factors: demand and supply.
It is known that Bitcoins are mined by independent miners using blockchain technology. What is less clear is the amount of bitcoins that can actually be mined. The total amount of this cryptocurrency is set at 21 mln, and at the moment over 18 mln has been mined. The mining rate has decreased from nearly 7% in 2016 to 4% in 2018, which means that there are attempts to control the speed of bitcoin production and its price.
Once all bitcoins are mined, their price will depend on whether or not traders adhere to any rules and regulations. Of course, as there are no rules and regulations concerning Bitcoin, to have it all mined and then traded will lead to absolutely unpredictable situations on the market. Thus, limiting the supply is by far the only way to control Bitcoin price.
Market demand has not only been one of Bitcoin’s biggest price factors, but also the principal cause of its volatility. The fact that Bitcoin has no traditional backing, e.g. gold, seriously questions its worth and prospects. Governmental bans on crypto exchanges and ambivalent media sentiment serve to decrease the demand. However, since its inception amidst the economic crisis of 2008-2009, Bitcoin has been seen as a hedge against inflation and instability, including political crises. The demand for it rocketed in 2020 during the pandemic and still shows no sign of fading.
The news regularly reports on the new cryptocurrencies arriving on the market. While it serves as a stimulus, it also influences the market price. The bigger the offer, the lower is the price and more people are inclined to invest in cryptocurrency. And when they do, they are likely to choose the one that has a long trading history. Of course, they choose Bitcoin.
Bitcoin production occurs according to a special blockchain algorithm. It involves several computers acting as nodes to mine a new block of bitcoin every, say, 10 minutes. Not only do miners pay for the opportunity to mine bitcoin, the cost of electricity required for production is also quite high. As a result, the total price of Bitcoin hugely depends on this factor. Moreover, any change in blockchain must be registered among all nodes; this is the principal antihacking measure.
Electricity consumption contributes to the pre-market price of Bitcoin. If it is low, and miners can make more profit, then the price will be fairly low, too. Conversely, high electricity prices will lead to a smaller profit margin for miners and to an overall price increase.
Crypto exchanges are the analogs of NYSE etc. in the virtual world. Investors have to pay in dollars to invest in Bitcoin, which they subsequently trade like any traditional currency. The goal of the exchange is to be able to offer as many cryptocurrencies as possible, as this in turn will generate an influx of investors. The network effect thus produced will allow the investors to profit from the market clout. The biggest catch that also influences the Bitcoin price is the security of the exchange. In the past, crypto exchanges were hacked and had to file for bankruptcy. As a result, today investors are very discerning and gravitate towards a few more secure exchanges. This is another one of the market factors affecting Bitcoin price.
As was mentioned before, governments are hesitant in adopting Bitcoin. Only in 2021, while El Salvador made Bitcoin legal tender, China demanded to stop all domestic operations with Bitcoin. At the same time, more and more businesses begin to accept Bitcoin for transactions, and some U.S. regulators consider its futures and securities. These measures, on the one hand, increase the demand for bitcoins, and, on the other hand, let institutional investors reduce the Bitcoin price, as it may go in either direction. Meanwhile, regular investors can simply buy Bitcoin at an affordable price.
Stability of blockchain and forks
Speaking of what factors influence the price of Bitcoin, it is impossible to avoid the mention of its governance. Bitcoin is seen as a store of value by both Tech and Finance industries. However, as it is not yet backed by any financial regulations, its very existence is in the Tech industry hands. Blockchain mechanism is not used exclusively by Bitcoin, and the first threat to its price is that miners may simply go to the new pastures in search of bigger income. Here soft and hard forks are used to determine the future. Soft forks indicate that Bitcoin is safe as the leading cryptocurrency, while hard forks hint at a new cryptocurrency entering the market.
These seven factors that influence Bitcoin price are the most decisive ones and need to be taken into account. As the world of crypto develops further, more factors are likely to appear to make the picture more complicated.