Key factors that impact Bitcoin’s price
The crypto sector has drawn numerous investors during the pandemic and even more once it ended because it proved that it’s one of the most profitable alternative asset classes when the right strategies are employed.
Bitcoin is one of the digital currencies that captured investors’ attention when researching what digital currencies to add to their portfolios, as it’s the oldest asset in the sector. Bitcoin was created 2009 by Satoshi Nakamoto, an anonymous entity that wanted to provide people with a virtual alternative to fiat money. The digital currency is recorded on a blockchain, so all transactions are recorded on the network, and users can access the history of transactions. Unlike fiat currencies, Bitcoin isn’t backed or issued by a government, and therefore, no one can control its price evolution. Its value is volatile, and investors are advised to check its price evolution and research how to buy Bitcoin on exchange platforms like Binance.
It’s far from unusual for blockchain-based cryptocurrencies to increase or decrease in value from one day to another. A set of factors impact their evolution. Here is a list of those that influence Bitcoin’s price.
Supply and demand
As mentioned earlier, Bitcoin was developed with the help of blockchain technology, so no government or central authority backs or controls it. It also means that inflation rates, monetary policies, and other economic factors don’t impact its value. A set of particular factors influence its price, and supply and demand are the most important.
Bitcoin’s supply has a substantial impact on its value. Bitcoin is defined as a scarce digital asset, so it has a high price. It was created to have a limited supply, so compared to other digital currencies with an infinite supply, it’s sold at a higher price. Bitcoin’s protocol allows for a predetermined rate of new coins, and it’s supposed to slow down in time. Its White Paper announced that there will be only 21 million Bitcoins, and to reach this number, the cryptocurrency will experience halving events every four years. The next halving event will happen in 2024, and the network will continue to run until around 2140, when the last Bitcoin will be mined. The market witnesses significant price increases around halving events.
Even if Bitcoin isn’t yet considered a medium of exchange accepted worldwide, it has attracted the interest of both individual and organizational investors. The demand for cryptocurrency fluctuates according to geopolitical and economic factors. Bitcoin has gained more popularity in places with devalued currencies and high inflation. Additionally, increased media coverage also attracts the public’s interest.
Mining produces new Bitcoins, requiring miners to use computers to verify new blocks before adding them to the blockchain. The competition for mining Bitcoin is relatively high because miners race to solve complex mathematical problems before the others so they get rewarded. However, not everyone can afford to engage in this endeavor because the powerful equipment needed for this purpose is quite expensive. And as expected, when the mining costs increase, so does Bitcoin’s value.
Bitcoin functions similarly to other assets regarding the influence the cost of production has on its value. Studies show that its price on crypto exchanges is connected to marginal manufacturing costs. The spending for electricity and infrastructure necessary to mine new Bitcoin and the resources needed to solve the mathematical problems make up Bitcoin’s cost of production.
While Bitcoin is the first cryptocurrency, it’s no longer the only one available in the sector. It has limited utilities even if it remains the most popular among investors. Hence, numerous alternative coins have started to draw the eye of the public. Ethereum, for example, emerged as the most dangerous contender to its status because it brought utilities like decentralized finance, non-fungible tokens, and smart contracts to the sector. Ether, its native currency, has attracted investors looking for alternative assets to diversify their portfolios because it proves that it has the potential to reshape the present financial infrastructure.
Traders can choose from around 13,000 tokens, and more are launched daily. However, while it’s easy for developers to create alternative coins, it takes a lot of work because bringing something innovative to the sector is challenging. A digital currency must have an application on the blockchain to gain momentum.
Bitcoin’s value stayed high because it set the standard for launching new tokens.
Changes in the regulatory environment
While no central authority controls Bitcoin, regulations govern how trades are completed. Governments must still establish rules and laws to establish the best practices for regulating digital currencies. Still, several countries have started to take steps in this direction. At present, cryptocurrencies are regarded as volatile and risky investments. Bitcoin is unregulated, so it lacks laws and borders. Its decentralization has both advantages and disadvantages. Because it’s unregulated, it can be used for cross-border transactions without the users worrying that they’ll be subjected to any restrictions imposed by authorities. However, in some countries, using Bitcoin can lead to criminal prosecution. Because some institutional investors are wary of investing in Bitcoin, its volatility remains high.
Most cryptocurrency exchange platforms allow transactions with mainstream digital currencies like Bitcoin and Ethereum. Smaller or newer cryptocurrencies are available on only a few exchange websites, limiting investors’ access to them. When a digital currency like Bitcoin is listed on several exchanges, the number of investors willing to purchase it is higher, and therefore the demand is increasing. As Bitcoin is the most popular cryptocurrency, its demand is relatively high, so it’s the most expensive digital currency in the market.
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Several other factors also affect Bitcoin’s price. Considering its volatile nature, investors need to research the market and know the conditions that might impact its value. As a decentralized blockchain-based currency, Bitcoin isn’t pegged to other assets, so its price varies from one exchange platform to another.