Know the variables that influence the ups and downs price of Bitcoin
Satoshi Nakamoto, the unidentified designer (or developers) of virtual currency, launched the cryptocurrency Bitcoin (BTCUSD) in 2009. The transactions for each unit are documented on a blockchain, which establishes ownership and makes the transaction history public. Bitcoin is not backed by a government or issued by a central bank like conventional currencies are. Bitcoin is unaffected by monetary policy, inflation rates, or economic growth figures as it is neither backed by a government nor issued by a central bank like other currencies are. The following variables affect Bitcoin price:
1. SUPPLY: The supply of a specific asset has a significant bearing on its price. An abundant asset will get cheap pricing, whereas a limited item will fetch high prices. Since its creation, there have been fewer Bitcoins available. The cryptocurrency mechanism only permits a set pace of fresh Bitcoin creation, intended to decrease with time. As a result, the supply of Bitcoin has decreased from 6.9% in 2016 to 4.4% in 2017 and 4% in 2018. Every four years, the supply of a cryptocurrency is halved, which often causes a major price increase.
2. DEMAND: Despite not being widely used as a medium of trade, Bitcoin has caught the attention of small-time investors. Based on a variety of economic and geopolitical factors, Bitcoin demand varies. In 2020, it’s possible that Chinese citizens utilized Bitcoin to get over banking restrictions. Additionally, nations like Venezuela, with severe inflation and depreciating currencies, have seen a spike in interest in Bitcoin. It is used by criminals to move huge quantities of money for illegal activities. Finally, greater media attention to cryptocurrencies has generated more investor interest. As a result, a decrease in supply and increased demand have caused Bitcoin prices to rise. In recent years, the Bitcoin ecosystem has been characterized by booms and busts. For instance, a prolonged winter was seen after a surge in Bitcoin prices in 2017.
3. PRODUCTION COST: Like the pricing of other goods, the manufacturing cost greatly impacts Bitcoin’s price. Studies show a strong correlation between the price of Bitcoin on cryptocurrency exchanges and its marginal production cost. Producing Bitcoin comprises the direct fixed costs for the power and infrastructure needed for mining and an indirect cost brought on by the algorithm’s degree of difficulty. The first miner to complete a difficult math problem wins freshly minted Bitcoins and any transaction fees accumulated since the previous block was found. It will require a lot of computing power to use brute force to solve the problem. This implies that the miner will have to spend a lot of money on expensive CPU mining equipment. Additionally expensive in terms of power is Bitcoin mining. Some estimates place the power consumption of Bitcoin mining at or above that of whole nations. The complexity of the algorithm is a hidden cost of Bitcoin mining. Bitcoin’s algorithms include varying degrees of difficulty, which may cause production to increase or decrease, altering the overall supply and price.
4. Bitcoin is expected to be the most widely used cryptocurrency by 2022. 8 However, its effectiveness has diminished with time. Nearly 80% of the total market value of cryptocurrencies in 2017 was made up of Bitcoin. That percentage will drop below 50% by 2021. The main cause is that more individuals learn about alternative currencies and their potential. A surge in decentralized finance (DeFi) tokens has made Ethereum’s Ether (ETHUSD) a viable rival to Bitcoin. Investors who think the cryptocurrency ether can transform current financial infrastructure have been drawn to the cryptocurrency, which is utilized as “gas” for transactions on its network. On October 13, 2021, Ethereum represented around 18% of the total market value of cryptocurrency exchanges. Additionally growing in popularity are Ripple’s XRP (XRPUSD) and Cardano’s ADA (ADAUSD), while the emergence of stablecoins has boosted Binance’s BNB token (BNBUSD).
5. The emergence of Bitcoin coincided with a financial collapse brought on by the relaxation of derivatives restrictions. The cryptocurrency industry is mostly unregulated and is known for having no formal boundaries or rules. Independence for Bitcoin offers both advantages and disadvantages. On the one hand, because it is unregulated, it is not subject to the same governmental regulations as other currencies and may be used freely across borders. Conversely, it implies that using and trading Bitcoin may lead to legal action in most financial jurisdictions. Because so many institutional investors are still leery of investing in the asset class, the ecosystem has less liquidity and is more volatile. The likelihood that Bitcoin will become a recognized asset class for investors increases as more countries integrate it into their economies and markets. Bitcoin is a leading indication of liquidity in cryptocurrency markets; thus, cryptocurrency traders and investors carefully monitor regulatory developments. These changes impact supply and demand, which causes the price to fall.
