The foremost name that comes to our minds when talking of cryptocurrency is Bitcoin. At this juncture of the world’s digital currency, Bitcoin is the most sought-after currency, with people rotting over to grab a coin for themselves. Bitcoins are available at a total of 21 million globally, and the shortage of this coin over time makes people scratch and claw for it. Even ordinary people can bitcoin trading with reliable platforms like Bitcoin system and benefit from it.
An anonymous person named Satoshi Nakamoto launched the bitcoin network in 2009. During that time, bitcoin was valued at less than a cent. Look how valuable it has become now! Each transaction of bitcoin has a record in the blockchain. It looks at the history of transactions concerning the cryptocurrency and its particular owners.
Investing in bitcoin is different from any other traditional currency investment as it has no backing by any central government or any bank. It makes it immune to the general financial developments of monetary policy, the rates of inflation, and even the growth in the economy.
Consequently, there are a few different factors that determine the price of each bitcoin:
- The bitcoin supply and the demand for bitcoin in the market.
- The cost incurred for finding out bitcoins through the mining procedure.
- The rewards that the bitcoin miners get for every verified transaction in the blockchain.
- The number of cryptocurrencies in competition with bitcoin.
- The exchanges for its trading.
- The regulations concerning the sales of bitcoins.
- Internal governance for proper mining and distribution of the cryptocurrency.
Supply In The Market
The countries devoid of fixed exchange rates for the foreign currency can exercise partial control on the circulation of their currency. They can do it by adjusting the discount rates, altering reserve requirements, or involving in competitions open to the market.
Two different scenarios can impact the supply of bitcoins:
- The new bitcoin protocols facilitate the creation of new bitcoins at a fixed rate. The arrival of new bitcoins occurs in the market only when the miners process various transactions in the blockchain. However, the speed of mining will reduce as time passes. The decreasing rate from 6.9% in 2016 to 4.0% in 2018 is solid proof in this aspect.
- The supply chain also receives the brunt of the limited number of bitcoins available in the market. Out of a total of 21 million, miners already got their hands on18.587 million bitcoins. It amounts to 88.5% of the total number! When all the bitcoins get mined, the prices will depend on the legality of their transactions.
Demand In The Market
The number of buyers for bitcoin determines the demand in the market for bitcoins. When buyers purchase bitcoins, the prices automatically go up, owing to increasing demand. You can be very sure that the market for bitcoins will crash without need, thus leaving all the coin holders at a loss. Several factors can trigger demand in the market;
The inflation in the country’s currency:
When a country goes through inflation, the prices of all goods rise, and the currency’s value falls. In such a situation, the demand for bitcoin elevates by leaps and bounds. It happens because inflation will not affect the bitcoin prices. The chances of a decreasing bitcoin value are minimal, even when the country suffers from hyperinflation.
The role of media in people’s lives is undeniable. They play a massive role in influencing people’s decisions concerning some aspect. The demand for bitcoin will rise if the media promotes it through daily coverage. Such coverage will let more people know about the cryptocurrency, thus injecting them with a thought to give it a shot.
Whenever government regulation comes into the picture, the trust among people will rise. Such rules have dual impacts on bitcoin. Some regulatory standards can squeeze all enthusiasm from the investors to go for bitcoins. They can do it through the imposition of taxes in a shorter period. If the government allows the procuring of bitcoins without any hassles, people will vouch for investing.
you might be shocked to know that even politics has its share of impact in generating demands for bitcoin. When the government is unstable and on the verge of falling, the need for bitcoin skyrockets.
Competition Among Various Cryptocurrencies
Bitcoins might be immensely popular among investors, but they are not the only tokens. The other cryptocurrencies are in constant competition, especially bitcoin, to garner as much attention from the customers as possible.
Consequently, the new Initial Coin Offering (ICO) is waiting at the horizon since the barriers are comparatively lesser. When the competition is high, the prices are down. Since the prices are lower, the demand will be increased.
In this scenario, bitcoin has leverage over the other cryptocurrencies owing to its greater visibility and recognition among investors.
Expenditure incurred in the production
You might feel how something virtual has a cost of production? Bitcoin might be a virtual currency rather than cryptocurrency, but there are numerous expenses that one needs to bear for mining them. Out of all the costs, electricity consumption holds the most value. If the price of electricity is lower, the miners can think of making more profit. Conversely, the higher the cost of electricity is, the lower the profit margin becomes.
The mining of bitcoin is a complicated process, where the miners have to solve specific algorithms within the blockchain for getting bitcoins. It is a competition that the miners engage in, with the winner getting hold of a new block of freshly mined bitcoins and any fee of transaction that a person paid for finding the last block.
However, there is something unique about bitcoin production. As against other produced goods, the algorithm of bitcoin allows the mining of only one block of bitcoins every ten minutes on average.
It symbolizes that when more miners get into the fray for cracking an algorithm, the completion gets more arduous, and the expenses increase.
Is It Available In Currency Exchanges?
Like investors can trade stocks through currency exchanges like Nasdaq, NYSE, etc., Cryptocurrencies have their exchanges for trading. You can identify such interactions through the names of GDAX, Coinbase, and many more. These exchanges allow the investors to trade and invest in cryptocurrencies to make the most profitable venture.
The popularity of a cryptocurrency exchange determines whether it will successfully gather participants. The more the popularity is, the more participants an exchange will get. It will give them the leverage in creating a network effect that will help them take advantage of the market clout. Now, they can set governing rules for adding other cryptocurrencies. Therefore, the more the availability is, the more the demand will be.
Legal Hurdles and Regulations
Bitcoin, along with other cryptocurrencies, saw a remarkable rise in its value in recent years. This sudden rise made the regulators contemplate classifying such digital assets. On the one hand, the United States Commodity Futures Trading Commission (CTFC) holds bitcoin as a commodity, whereas the Securities and Exchange Commission (SEC) considers its securities. Such differences among diverse regulators create a lot of discrepancies concerning the setting of rules. Such developments amidst the rising capitalization of the market are a difficulty.
Moreover, various financial firms now use cryptocurrency as a medium of transaction, an underlying asset like futures and Exchange Traded Funds (ETF).
Such regulations can affect the prices of bitcoin in two ways:
- It gives those investors access to bitcoins who cannot even think of having one, thereby propelling demand.
- This allows institutional investors to believe that bitcoins will have an overvalued or undervalued future, thus reducing their prices. Such people can put their substantial resources at stake to predict that bitcoin’s prices will go in a different direction.
Stability Of Governance And Forks
The governance of bitcoins relies on miners and developers, as it is not under some central authority. They have the responsibility to make transactions happen and keep the blockchain secured from threats. Any software change is under the influence of consensus, thus frustrating the bitcoin community concerning delayed confusions and problems.
One of the particular pain points in this regard is the problem of scalability. The size of the blocks determines the transaction count up for processing, and the current bitcoin software allows a maximum of three transactions per second.
Earlier, this was not a point of concern owing to lower demands. With the rising demand among investors, worry the miners that they will divert to other cryptocurrencies in search of faster transaction speed.
The bitcoin community holds diverse opinions concerning the best trick to propel the number of transactions. Here comes the utility of “Forks.” They refer to the alterations in the underlying rules of governance.
They are of two types:
- Soft Forks: They vouch for changing rules that will prevent the creation of a new cryptocurrency.
- Hard Forks: They result in changes leading to new cryptocurrencies.
Now that you know the determinants affecting the price of a Bitcoin, look for such developments in the exchanges. When you notice the results going in favor of your profits through Bitcoins, vouch for investments. Manipulative regulation of assets will push you to better heights.