Despite the coronavirus and the destruction of the world’s major economies, the digital currency market has continued on the path of growth and development. Most recently, the volume of investments in this market has exceeded one trillion marks. What is remarkable is that among all popular digital currencies, Bitcoin still holds the highest volume of the entire market, which is about 69%.
Factors that determine the price of Bitcoin
Unlike common currencies approved by banks (dollars, rials, etc.), Bitcoins are not issued by the central bank and are not even backed by governments. Therefore, monetary policy, inflation rates, and economic growth measures (which usually affect the value of the currency) have no impact on Bitcoin.
If you have ever wondered what factors influence the price of Bitcoin, be sure to read this article. Below, we have compiled a list of factors that influence the price of Bitcoin and explain each factor individually.
At first glance, some of the factors mentioned in this list may seem confusing to you, but we will discuss them in detail below to make them easier to understand.
delivery
The supply of an asset, whether digital or not, plays a significant role in determining its price. A scarce good is likely to have a high price. If the asset is abundant and there are many of them on the market, its price is low. Since the introduction of Bitcoin, its supply has been decreasing day by day.
The digital currency protocol only allows the creation of new Bitcoins at a fixed exchange rate. This rate is expected to decrease over time. To better understand this question, let’s look at the percentage of Bitcoin supply over these three years. The supply volume of Bitcoin, which was slightly lower than 6.9% in 2016, fell to 4.4% in 2017 and 4% in 2018. During these years, we have observed an increase and decrease in the price of this digital currency.
How does the supply of Bitcoin affect the price?
Since the introduction of Bitcoin in 2009, the supply of this digital currency has decreased. Every four years, the digital currency experiences an event called a “halving”. During this event, the reward for cryptocurrency miners will be reduced by half. Due to media coverage and fluctuations in the price of Bitcoin, the decrease in supply coincides with the increase in demand. The combination of a decreasing supply and a rapidly increasing demand will eventually lead to an increase in the price of Bitcoin.
demand
The growing popularity of Bitcoin as a major trading platform has also attracted the attention of retail investors to this digital currency. The source of demand for Bitcoin changes depending on economic considerations. It has been reported several times that Chinese citizens have used digital currencies to circumvent capital control laws in that country in 2020. Bitcoin in countries such as Venezuela and Iran (which suffer from high inflation and devaluation of the local currency).
It has gained considerable popularity. Unfortunately, speculators and scammers also use this currency to transfer large sums of money as part of their illegal activities. Similarly, with the increase in media coverage, investor demand for this digital currency has increased and has become an incentive for the price of Bitcoin. Of course, it is worth noting that the alternation of boom and bust periods in Bitcoin transactions has become commonplace in the ecosystem of this digital currency.
Production Costs
The production costs of Bitcoin, like other goods, play an important role in determining the price. According to research, the price of Bitcoin in digital currency markets is very closely related to the final cost of its production. Bitcoin production costs include the sum of fixed and direct costs related to providing the infrastructure and electricity needed to mine the digital currency, as well as indirect costs related to the difficulty of its algorithm.
In simpler terms, Bitcoin mining means that miners compete to solve a complex mathematical problem. The first miner to solve the problem will be rewarded with new Bitcoins. This person also receives the fees earned since the discovery of the last Bitcoin block.
A miner spends a lot of money to equip cryptocurrency mining machines with expensive processors. The process of Bitcoin mining also makes the electricity bill very expensive. According to some estimates, these amounts represent around 90-95% of the total cost, which is very significant.
Some websites have estimated that the electricity consumption required for the Bitcoin mining process is at least equal to the electricity consumption of the entire country. The indirect costs of Bitcoin mining depend on the difficulty of the algorithm. The different difficulty levels of Bitcoin algorithms make the production rate of this digital currency fast or slow, affecting its overall supply and price.
The relationship between Bitcoin production costs and its price
According to research, the market price of Bitcoin is closely related to the final cost of its production. Depending on the price of digital currency mining equipment and electricity consumption, the cost of Bitcoin mining is different in some countries, and there is a difference between the price of electricity and the import duties of mining equipment. The higher the mining cost of this digital currency, the more miners will not just sell Bitcoin at the previous price. For this reason, the recommended price for selling this digital currency is higher.
skill
Although Bitcoin is the most well-known digital currency on the market, hundreds of other tokens are vying for the attention of cryptocurrency investors. Bitcoin has dominated the cryptocurrency market for years but is gradually disappearing.
In 2017, Bitcoin accounted for over 80% of the total cryptocurrency market capitalization, but by 2021, this share will fall to less than 50%. The main reason is the growing popularity of alternative digital currencies. For example, Ethereum (ETH) is a major competitor to Bitcoin due to the growing popularity of decentralized tokens.
Investors have invested in Ethereum, recognizing the potential of digital currency to reinvent modern financial infrastructure. As of October 13, 2021, Ethereum accounted for nearly 18% of the total cryptocurrency market volume. Ripple (XRP) and Cardano (ADA) are now also very popular and capture a significant share of the market volume.
Now, you might be wondering: if Bitcoin has a lower market share than in recent years, why is its price still rising? While this competition has reduced Bitcoin’s dominance, it has also attracted more investors. This has increased the demand and awareness of digital currencies. As the flagship of the digital currency ecosystem, Bitcoin has benefited from this attention and its price has also increased.
Regulatory News
Bitcoin is the product of a financial crisis. A crisis that disappeared with the release of regulations on blockchain markets. However, there is generally no supervision of digital currencies; they have gained global fame thanks to their unlimited ecosystem.
The surveillance state of Bitcoin has advantages and disadvantages. On the other hand, the lack of supervision means that this digital currency can be used freely across borders and is not subject to the government oversight imposed on other currencies. On the other hand, it means that the use and exchange of Bitcoin carries criminal consequences in most financial courts. Many institutional investors are still reluctant to invest in the cryptocurrency market, which leads to less liquidity and more volatility in the ecosystem.
The more governments around the world adopt Bitcoin into their economies and markets, the more likely it is that this digital currency will become a legal asset for investment. Investors and traders of digital currencies closely monitor regulatory developments regarding Bitcoin. Because it is directly linked to the liquidity index in digital markets. These developments put pressure on the price of the digital currency due to their impact on supply and demand volumes.
In China, Bitcoin trading is prohibited and mining infrastructure is limited, which impacts the supply and demand of digital currency. In the United States, cryptocurrency regulations (provided by the Securities and Exchange Commission (SEC)) often have a direct impact on the price of Bitcoin. In November 2021, shortly after the SEC released the first Bitcoin ETF for trading, the price of Bitcoin reached over $68,000, breaking its previous high.
One of the interesting points in the digital currency space is that governments are unable to set effective regulatory policies and therefore, regulatory policies for Bitcoin are set by a group of large producers and miners of digital currency. Constitutional changes will change the agreed amount of Bitcoins available. Moreover, since producers do not agree on the future direction of the digital currency, investment metrics are subject to significant changes.
News and Rumors
In the emerging Bitcoin ecosystem, news and rumors have a direct impact on the price. There are different types of messages. As mentioned above, regulatory news leads to sharp fluctuations in the price of cryptocurrencies. Moreover, well-known celebrities and billionaires like Elon Musk will completely break the market from its previous trend with a tweet in favor of a digital currency. Elon Musk’s support for Bitcoin in 2021 led to the growth of Sharpie on the price chart of this digital currency and showed the influence of well-known people on the digital currency market.
last word
Bitcoin is a mystery to some and a growth opportunity for others. Now that you know the factors that influence the price of this digital currency, you can look at the cryptocurrency market from a better perspective and be among those who see Bitcoin as a growth opportunity.
Of course, you should keep in mind that influencing factors such as news and rumors do not always cause a rise in the price of digital currencies, because market participants may have a different assessment of the situation and the market may react completely opposite to the news. So try to keep in mind your logical analysis of market conditions. Be successful and profitable.
Post a Comment
0Comments