Bitcoin, unlike traditional currencies, is neither issued by a central bank nor backed by a government; as a result, monetary policy, inflation rates, and economic growth statistics that traditionally influence currency value do not apply to Bitcoin. The following factors, on the other hand, have an impact on Bitcoin prices:
- The supply of Bitcoin and the demand for it in the market
- The cost of manufacturing a bitcoin via the mining process
- Bitcoin miners receive rewards for validating transactions on the network
- The number of cryptocurrencies in competition
- The state of its internal governance and the regulations controlling its sale and use
- Up to date information
Supply
The supply of a particular asset has a significant impact on its price. A rare asset is more likely to command high prices, whereas a great asset will command low prices. Since its beginning, Bitcoin’s supply has been falling. The cryptocurrency protocol only creates new bitcoins at a set rate, which will slow down over time. As a result, the supply of Bitcoin has decreased from 6.9% in 2016 to 4.4 percent in 2017 and 4% in 2018. 2 Bitcoin halving events, which happen every four years, usually result in a considerable increase in the cryptocurrency’s price because supply has been cut-off.
Demand
Bitcoin has drawn the attention of retail investors, even though it has yet to find popularity as a medium of trade. The demand for Bitcoin changes depending on economic and geopolitical factors. China’s residents, for example, may have utilized bitcoin to avoid capital regulations in 2020, according to reports. 3 Bitcoin has also grown in popularity in nations like Venezuela with significant inflation and devalued currencies. 4 It’s also popular among criminals, who use it to move enormous sums of money for illegal purposes. 5 Finally, more media coverage has raised investor interest in cryptocurrencies.
This means that a decrease in supply has coincided with an increase in demand, fueling bitcoin prices. The bitcoin ecosystem has become characterized by alternating periods of booms and crashes. For example, in 2017, a surge in bitcoin prices was followed by a long winter.
Production Costs
The cost of production, like that of other commodities, has a significant impact on setting the price of bitcoin. According to studies, Bitcoin’s price in crypto marketplaces is strongly connected to its marginal manufacturing cost.
The cost of production for bitcoin is generally equal to the total of direct fixed expenses for infrastructure and power required to mine the cryptocurrency and an indirect cost due to the algorithm’s difficulty level. Miners compete to solve complicated math problems, with the first miner receiving a reward of newly mined bitcoins and any transaction fees accumulated since the last block was located.
To solve the problem, you’ll need to use brute force, which means a lot of computing power. In terms of money, this means that the miner will have to invest in racking mining rigs with high-end CPUs. According to some estimates, bitcoin mining also comes with high electrical expenditures, which account for 90 to 95 percent of total costs.
According to some estimates, the amount of electricity consumed by bitcoin mining is equivalent to or greater than that consumed by whole countries. The difficulty level of bitcoin mining’s algorithm is an indirect cost. The difficulty levels of bitcoin’s algorithms can speed up or slow down bitcoin production, altering its overall supply and, as a result, its price.
Competition
Hundreds of different tokens compete for crypto investment funds, although Bitcoin is the most well-known cryptocurrency. Bitcoin is expected to dominate cryptocurrency markets by 2021. However, its power has dwindled with time. Bitcoin accounted for more than 85% of the total market capitalization of cryptocurrency markets in 2017. By 2021, that percentage has dropped to under 50%.
The leading cause for this was a rise in the knowledge of alternative currency and their possibilities. Because of a surge in decentralized finance (Defi) tokens, Ethereum’s Ether (ETHUSD) has emerged as a formidable competitor to Bitcoin. Ether, the cryptocurrency utilized as “gas” for transactions on its network, has attracted investors who see its promise in redesigning the rails of modern financial infrastructure. On October 13, 2021, Ethereum accounted for about 18% of the total market capitalization of cryptocurrency markets. The popularity of Ripple’s XRP (XRPUSD) and Cardano’s ADA has also risen, while the rise of stable coins has drawn attention to Binance’s BNB token.
Competition has lured investors to the asset class, despite having drained investment money away from the Bitcoin ecosystem. As a result, demand for cryptocurrencies has soared, as has public awareness of them. Bitcoin has benefited from the attention as a flagbearer for the cryptocurrency ecosystem, and its prices have risen.
The number of cryptocurrencies in competition
There’s no doubting that Bitcoin is one of the most well-known cryptocurrencies, but around 1000 other coins are fighting for market share. Ethereum (ETH), Polkadot (DOT), Binance Coin (BNB), and Cardano are some more notable altcoins (ADA).
Price Impacts of Influencers
Influencers or tech behemoths like Elon Musk can have a massive impact on Bitcoin’s price. A single tweet can spark the crypto market from the man behind Tesla. Musk announced a few months ago that Tesla would no longer accept Bitcoin payments due to environmental concerns. The price of Bitcoin fell by about 15%. Musk tweeted another meme about breaking up with Bitcoin on June 3, 2021, and the cost of Bitcoin dropped another 5%. Musk recently stated that Tesla would accept Bitcoin payments after crypto miners switch to “acceptable clean energy usage” and Bitcoin values rise by 8%.
Recent Regulatory Changes
Bitcoin was developed in the aftermath of a financial catastrophe brought on by the relaxing of derivatives laws. A single entity cannot control the cryptocurrency ecosystem. It has earned a reputation for being devoid of borders and regulations. The regulatory position of Bitcoin offers both advantages and disadvantages. On the one hand, its lack of regulation allows it to be freely used in all countries and not subject to the same government-imposed limitations as other currencies.
However, in most financial jurisdictions, Bitcoin use and exchange can result in criminal charges. The great majority of institutional investors are still hesitant to invest in the asset class, resulting in reduced liquidity and enhanced volatility in the ecosystem.
The more governments adopt bitcoin into their economies and markets, the more likely it will become a genuine investment asset class. Cryptocurrency investors and traders actively follow Bitcoin regulatory changes since it is a leading liquidity indicator in the crypto markets. These changes put downward pressure on its price by affecting supply and demand.
For example, China’s measures to ban bitcoin trading and restrict mining infrastructure operations impact the cryptocurrency’s supply and demand.
Cryptocurrency judgments issued by the Securities and Exchange Commission (SEC) in the United States frequently directly impact the price of Bitcoin. For example, when the SEC approved trading of the first bitcoin-related ETF, the ProShares Bitcoin Strategy ETF, in October 2021, the price of Bitcoin soared beyond $60,000. (BITO).
Recent Development
Because of Bitcoin’s fledgling ecosystem, news events have a direct impact on its price. These developments might take many forms. As previously stated, regulatory news can have a significant effect on cryptocurrency values. Hard and soft forks, which modify the number of bitcoins in circulation, can affect investor perceptions of the cryptocurrency. For example, in August 2017, the fork of Bitcoin’s blockchain into Bitcoin Cash caused price volatility and pushed both coins’ valuations to new highs.
Bitcoin’s price is influenced by its governance regulations, which a group of core developers defines. Investors pay close attention to protocol changes that affect the number of bitcoins in circulation, as well as philosophical arguments among developers over the cryptocurrency’s future path.
The utility and transferability of Bitcoin are further hampered by the hurdles associated with storage and trading. Hacks, thefts, and fraud have plagued digital currency exchanges in recent years.