What Influences the Price of Bitcoin? Top 5 Factors That Are Involved
Bitcoin (BTCUSD) is a cryptocurrency that was founded in 2009 by Satoshi Nakamoto, the anonymous developer of virtual money (or creators). Each unit’s transactions are recorded on a blockchain, which establishes ownership and discloses the history of transactions.
Unlike traditional currencies, Bitcoin is not issued by a central bank or backed by a government.
Understanding the Factors That Affect the Price of Bitcoin
Bitcoin, unlike traditional currencies, is neither issued by a central bank nor backed by a government, so it is unaffected by monetary policy, inflation rates, or economic growth statistics. The following factors have an impact on Bitcoin prices:
A particular asset’s supply has a substantial impact on its price. A scarce asset will command high prices, whereas a bountiful asset will command low prices. Bitcoin’s supply has been decreasing since its inception. The cryptocurrency’s system only allows for a predetermined rate of new bitcoin generation, which is designed to slow down over time. As a result, Bitcoin’s supply has reduced from 6.9% in 2016 to 4.4 percent in 2017 and 4 percent in 2018. Because the cryptocurrency’s supply is reduced every four years, halving events usually result in a significant price increase.
Despite its lack of acceptance as a medium of exchange, Bitcoin has attracted the interest of retail investors. Bitcoin demand fluctuates based on economic and geopolitical reasons. According to estimates, Chinese residents may have used bitcoin to circumvent financial controls in 2020. Bitcoin has also increased in popularity in countries with high inflation and devalued currencies, such as Venezuela. Criminals utilize it to shift large sums of money for unlawful purposes. Finally, increased media coverage of cryptocurrencies has piqued investor interest.
As a result, a fall in supply has coincided with an increase in demand, driving bitcoin prices upward. Booms and busts have defined the bitcoin ecosystem in recent years. For example, a spike in bitcoin prices in 2017 was followed by a long winter.
Also, read – Is Bitcoin a Risk-On or a Risk-Off Asset?
Costs of Production
The cost of production, like the cost of other commodities, has a significant influence on bitcoin’s price. According to studies, the price of bitcoin on crypto exchanges is closely linked to its marginal manufacturing cost.
The total direct fixed expenses for infrastructure and electricity required to mine bitcoin and an indirect cost due to the algorithm’s difficulty level make up bitcoin’s cost of production. Miners compete to solve a challenging math issue, with the first miner earning newly created bitcoins as well as any transaction fees accrued since the last block was discovered.
You’ll need to apply brute force to solve the problem, which will take a lot of processing power. In terms of money, this means that the miner will have to invest in high-end CPU mining rigs. Bitcoin mining is also costly in terms of electricity. According to some estimations, bitcoin mining consumes the same amount of electricity as or more than whole countries.
The algorithm’s difficulty level is an indirect cost of bitcoin mining. The difficulty levels of bitcoin’s algorithms can speed up or slow down production, changing the total supply and, as a result, the price.
By 2022, Bitcoin is predicted to be the most popular cryptocurrency. 8 Its potency, however, has waned with time. In 2017, Bitcoin accounted for almost 80% of the overall market capitalization of cryptocurrency markets. By 2021, that number will have slipped below 50%.
The fundamental reason for this is that people are becoming more aware of alternative currencies and their possibilities. Ethereum’s Ether (ETHUSD) has emerged as a serious contender to Bitcoin as a result of a boom in decentralized finance (DeFi) tokens. The cryptocurrency ether, which is used as “gas” for transactions on its network, has attracted investors who believe it has the potential to reshape existing financial infrastructure. Ethereum accounted for nearly 18% of the entire market capitalization of cryptocurrency marketplaces on October 13, 2021.
The popularity of Ripple’s XRP (XRPUSD) and Cardano’s ADA (ADAUSD) has also increased, while Binance’s BNB token has benefited from the emergence of stablecoins (BNBUSD).
Despite the fact that it has siphoned investment money from the Bitcoin ecosystem, competition has enticed investors to the asset class. As a result, public awareness of cryptocurrencies has increased, as has demand for them. Bitcoin’s prices have soared as a result of its status as a kind of standard-bearer for the cryptocurrency ecosystem.
Changes in the Regulatory Environment
Bitcoin was born in the context of a financial meltdown caused by the loosening of derivatives regulations. The cryptocurrency ecosystem is mostly unregulated, and it has a reputation for lacking borders and laws.
Bitcoin independence has both positive and negative implications. On the one hand, because it is unregulated, it can be freely used across borders and is not subject to the same government-imposed restrictions as other currencies. On the other hand, it means that in most financial countries, operating and trading Bitcoin might result in criminal prosecution. The vast majority of institutional investors remain wary of investing in the asset class, resulting in reduced liquidity and higher volatility in the ecosystem.
The more governments integrate bitcoin into their economies and markets, the more probable it is to become a legitimate asset class for investors. Because Bitcoin is a leading indicator of liquidity in the crypto markets, cryptocurrency investors and traders closely monitor regulatory changes. These shifts exert downward pressure on its price by altering supply and demand.
China’s actions, such as banning bitcoin trading and limiting the operation of bitcoin mining infrastructure, have an impact on the cryptocurrency’s supply and demand.
The price of Bitcoin is frequently affected by cryptocurrency judgments issued by the Securities and Exchange Commission (SEC) in the United States. The day after the Securities and Exchange Commission (SEC) allowed trading of the first bitcoin-related ETF in the United States, the ProShares Bitcoin Strategy ETF, the price of Bitcoin rocketed beyond $66,000 in October 2021. (BITO).