Bitcoin is a highly volatile investment option, with weekly double-digit percentage point fluctuations being quite common. Even when Bitcoin and other cryptocurrencies have been extremely volatile, they have outperformed most of the other asset classes in the past few years. Around a decade ago, Bitcoin had a price tag of just $1. Last year, it traded for over $65,000.
So, what affects the price of Bitcoin? What factors cause its price to fluctuate? Find out in this guide.
The Rules of the Bitcoin Network
A new block gets added to the Bitcoin blockchain every 10 minutes.
- The transactions added to the blockchain get coded
- There is a competition between the miners in the network to become the first node to solve a complicated cryptographic puzzle
- The winner is recorded as the first node to mine a block and gets the block reward
- A block is added after the consensus in the network between all the network participants
- Every transaction in the network follows a precision process without any changes since the inception of the Genesis Block, the first block
- The block reward amount can however vary over time
So, What Determines the Price of Bitcoin?
Bitcoin, like other cryptocurrencies, is not issued by the government-backed central bank. Factors such as inflation, monetary policy, and economic growth factors that usually affect the value of currency don’t make a similar impact on Bitcoin.
Its prices are mostly affected by the following list of factors:
- Supply and demand for Bitcoin
- Cost of mining Bitcoin
- Rewards received by Bitcoin miners
- Government regulations
- Competitor cryptocurrencies
- Relevant News developments
Like any other asset, Bitcoin’s supply also affects its price. This cryptocurrency’s supply has seen a decline since its inception. Its protocol enables only a fixed rate of creation of new bitcoins and this rate has been designed to slow down with time.
The crypto also has the tradition of having its supply halved every 4 years. This usually causes a significant increase in its prices.
Reasons why,cryptocurrency is so popular are here. These platforms allow traders to trade against Bitcoin. Users can purchase other cryptos using their Bitcoin. When they sell their Bitcoin, they are increasing the supply.
Bitcoin has more recently gained widespread popularity among retail investors. Its location of demand usually keeps shifting based on geopolitical and economic factors. Some of the most important factors at play here include:
- Market Inflation: When a country’s currency suffers inflation, the demand for Bitcoin increases. The reason is that people perceive cryptocurrency to be much less likely to fall in value.
- News Coverage: News developments have a big role in affecting the market demand for Bitcoin and other cryptos. Celebrity endorsements can have a big impact on the price of cryptocurrencies. As the price of Bitcoin increases, news outlets are known to give it sensational coverage, thus driving more market demand.
- Regulation: The purpose of regulation is to make cryptos more accessible and safer to invest in. However, they can also prevent or discourage investors from investing in Bitcoin. Regulations causing increased taxes and consumer identification requirements can affect demand.
- Political Climate: Bitcoin has shown a trend of price rise in more unstable political climates. Since the government controls fiat currency, people have lower trust in the currency whenever the government becomes unusable. This causes an increase in demand for Bitcoin.
Impact of Bitcoin Scarcity on its Price
Bitcoin is different from fiat currency in many ways. One of the most important of them is in its limited supply. Its overall supply is capped at 21 million. Since the rate at which new Bitcoin is created keeps slowing over time, the demand tends to increase compared to supply. This increases the chances of the cryptocurrency rising in price.
Besides, Bitcoin’s future monetary policy of introducing inflation is well known. This gives investors more confidence in their investment decision. On the other hand, the creation of fiat currency is infinite.
Thus, there are many factors at play that determine the price of Bitcoin. Bitcoin is currently the most sought-after digital currency and its value is expected to appreciate further. It is recommended to assess all the key factors before including it into your crypto portfolio.