What Determines the Price of Bitcoin? | What Determines the Price of Bitcoin?Financial Buzz

What Determines the Price of Bitcoin?

At the time of writing, the price of one Bitcoin was $49,681.50. There is a good chance that by the end of this report, the price of the largest digital currency in the world might fall or gain by 5% or even 10% if not more.

Bitcoin is a cryptocurrency and has once again come under the radar as its price has risen at an exponential rate in the last year. While it is viewed as an alternate asset class, investors should note that the digital currency is extremely volatile due to a multitude of reasons.

In case you are new to the crypto space, you can take a look at CryptoPotato’s extensive bitcoin for beginners guide. However, if you are now looking to invest in this highly disruptive asset class, you also need to understand what impacts the price of bitcoin and other peer cryptocurrencies.

Supply and demand

One of the major factors impacting the price of bitcoin is its supply and demand. Just in the case of equities, if there is a huge demand for a stock there are more buyers than sellers. So, it is safe to assume that the price of the underlying asset is bound to rise.

Currently, the total number of bitcoins available for purchase is limited to 21 million. When this limit is reached, it will not be possible to mine additional coins. The supply of bitcoin touched 16.8 million at the start of 2017 and as of February 24 this year, the number of bitcoins in circulation was 18.63 million.

This just leaves 2.362 million bitcoins that can be introduced. We can see around 90% of the total amount of bitcoins available have already been mined and made available to the public. As we would have studied in our first class of economics, the price of a product rises when the demand can’t keep up with supply.

User adoption

In the last 12-months, the price of bitcoin has gained significant momentum due to a stellar rise in the adoption rate by institutional investors. In the past, it was retail capital that drove the price of bitcoin higher. However, crypto experts believe that the bull run since March 2020 has been due to widespread adoption by institutional investors including billion-dollar giants such as Tesla, Square, Microstrategy, and MasterCard.

This rising popularity has led to a surge in the prices of bitcoin and several other cryptocurrencies including Ethereum and Litecoin.

Uncertainty on the future price

Another reason for the volatility in the prices of cryptocurrencies is the lack of certainty and regulations surrounding this space. There are varying perceptions of bitcoin all over the world. While some governments view the crypto space as disruptive and revolutionary other economies are not too enthused about bitcoin’s potential to replace traditional fiat currencies.

Alternatively, Bitcoin is also viewed as a store of value or an asset that maintains its value over time without depreciating. According to a report from Investopedia, “A store of value is the function by which an asset can be useful in the future with some predictability. A store of value can be saved and exchanged for some good or service in the future.”

Availability on exchanges

Several crypto exchanges allow investors to buy and sell bitcoin as they connect buyers and sellers in a marketplace. Networks are then created through these marketplaces as the exchange gains in popularity. It also becomes easier for the exchanges to gain more participants.

The price of Bitcoin is impacted by its availability on exchanges as it has a direct effect on the popularity of cryptocurrencies due to the increase of market participants. So, the more popular bitcoin becomes, the higher the demand and as stated earlier there is a finite amount of bitcoin. So here, the supply is limited even as demand increases.

Competition

While Bitcoin is the most popular cryptocurrency in the world with the largest market cap, there are now over 1,000 digital currencies that you can buy. The presence of competition ensures the value of an investment is kept in check. For example, there is a good chance that the value of the U.S. dollar would have been different if currencies such as the Euro, Pound, and the Yen did not exist.

Internal governance

Since bitcoin is not regulated by a single authority, miners are put on the spot to process transactions and secure the blockchain. In case miners want to tweak or change the software, it has to be the decision of the consensus. So, members of the bitcoin community believe solving fundamental issues can take longer than expected.

Right now the bitcoin software is able to process just three transactions per second which is incredibly slow considering its popularity. The bitcoin community is figuring out ways to improve scalability and speed up the number of transactions.

In a few cases, when these changes are applied they are turned into a whole new cryptocurrency just like Bitcoin Cash and Bitcoin Gold.

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