Bitcoin (BTC) is a cryptocurrency created in 2009 by Satoshi Nakamoto, the anonymous creator (or creators) of the cryptocurrency. Transactions are recorded on a blockchain, which reveals the history of each unit’s transactions and establishes ownership.
Bitcoin is not backed by a government or issued by a central bank, as is the case with traditional currencies. Because Bitcoin is not a company, acquiring a bitcoin differs from purchasing a stock or bond for investors. As a result, there are no business balance sheets or Form 10-Ks to examine, fund performance to compare, or other traditional investment instruments to use.
Learn what factors affect Bitcoin’s price so you can make better judgments about whether or not to invest in it. Surely, our recommendation is to get crypto price on cex.io and start investing in Bitcoin and other cryptocurrencies.
What Determines Bitcoin’s Price?
Because Bitcoin is neither issued by a central bank nor backed by a government, the monetary policy tools, inflation rates, and economic growth indicators that normally impact the value of a currency do not apply to it. The following factors have an impact on Bitcoin’s price since it is more of a commodity that is used to store value:
- The supply of Bitcoin and the demand for it on the market
- The cost of creating a bitcoin via the mining process.
- The number of cryptocurrencies in competition
- Regulations that control the sale and use of it
- News and the media
Supply’s Effect on Bitcoin’s Price
An asset’s supply has a massive impact on its price. High prices are more likely for a rare asset, and low prices are more likely for a plentiful asset. Bitcoin’s supply is well-known, as there will only ever be 21 million coins generated, and only a certain number will be created each year. Its system only allows for the creation of new bitcoins at a certain rate, which is supposed to slow down with time.
As a result, the future supply of Bitcoin is decreasing, rising in demand. This is similar to a decline in corn supply if harvests were lowered every four years until no more could be harvested, and the fact that this would happen was made public, corn prices would skyrocket.
Bitcoin’s Price and Demand
Bitcoin has piqued the interest of both retail and institutional investors, resulting in increased demand fueled by more media coverage and investment “experts” and business owners praising Bitcoin’s current and future worth. Bitcoin has also grown in popularity in nations like Venezuela that have significant inflation and depreciated currencies. It’s also popular among individuals who use it to send big quantities of money for unlawful and illegitimate purposes.
This indicates that a decrease in future supply has coincided with an increase in demand, causing bitcoin’s price to climb in 2021. Its price, on the other hand, is subject to boom and bust cycles. For instance, a price surge in Bitcoin in 2017 was followed by a lengthy trough, followed by two rapid climbs and downticks through 2021. The year 2022 brought the high volatility of bitcoin, which is now worth about 30 thousand dollars.
Production Costs and Bitcoin Price
Production costs, like those of other commodities, play an important part in setting bitcoin’s price. Bitcoin’s price in crypto marketplaces is said to be strongly tied to its marginal cost of production, according to specific research.
The production cost of Bitcoin is roughly equal to the total of the direct fixed expenses of infrastructure and electricity necessary to mine the cryptocurrency as well as an indirect cost due to the algorithm’s difficulty level. A network of bitcoin miners competes to solve for an encrypted number; the first miner to do so receives newly minted bitcoins as well as any transaction fees earned since the last block was found.
To open a block and get a reward, you must use brute force and a lot of processing power to solve the hash. In terms of money, the miner will have to purchase a large number of pricey mining machines. Bitcoin mining also requires hefty electricity bills. According to some estimations, the bitcoin mining network consumes more electricity than several small countries.
How Competition Affects Bitcoin’s Price
Hundreds of different tokens compete for investment funds, even though Bitcoin is the most well-known cryptocurrency. Bitcoin is projected to dominate cryptocurrency trading. However, its power has dwindled with time. Bitcoin accounted for approximately 80% of the total market capitalisation in cryptocurrency exchanges in 2017. By 2022, that percentage had dropped to less than 50%.
The major reason for this is that people are becoming more aware of alternative coins and their possibilities. Because of the surge in decentralized finance, Ethereum, for example, has emerged as a serious rival to Bitcoin. ETH, the cryptocurrency utilized as “gas” for transactions on its network, has attracted investors who see its potential in redesigning the rails of modern financial infrastructure. Ethereum accounts for almost 20% of the total market capitalization of cryptocurrency marketplaces.
Regulations and Bitcoin’s Price
Bitcoin was created in the context of a financial crisis brought on by the easing of derivatives laws. The cryptocurrency itself is still unregulated, and its ecosystem has earned a reputation for being devoid of borders and regulations.
The fact that Bitcoin is unregulated has both advantages and disadvantages. It may be used freely across borders and is not subject to the same government-imposed regulations as other currencies due to its lack of regulation. Governments and other interested parties, on the other hand, are continuing to push for cryptocurrency regulation.
It’s just a matter of time until a regulatory framework emerges, and the impact it will have on Bitcoin’s price is uncertain. Cryptocurrency rulings issued by the Securities and Exchange Commission (SEC) in the United States, for example, can have an impact on Bitcoin’s price. The price of Bitcoin soared to $69,000 in October 2021, only weeks after the SEC authorized the first bitcoin-linked ETF in the United States: the ProShares Bitcoin Strategy ETF (BITO). However, Bitcoin’s price was hanging around $40,000 just a few months after it reached that level.
Bitcoin’s Price and the Media
The media and news coverage work both for and against Bitcoin’s price in an attempt to keep investors and interested parties informed. Any changes in any of the previously mentioned parameters are instantly publicized and distributed to the general public. As a result, positive news for cryptocurrency investors tends to drive up the price of Bitcoin, while negative news tends to drive it down.
One of the most important elements driving cryptocurrency prices is investor outlook, which is influenced by a mix of supply, demand, production costs, competition, regulatory changes, and the media coverage that follows.
To summarize, the Bitcoin price is influenced by a variety of factors. Supply and demand, like with every traded asset, determine the price. Furthermore, several aspects of Bitcoin’s nature, such as the number of unmined Bitcoins left, have a significant effect on its market value. In recent years, we’ve found that influencers’ opinions on Bitcoin have generated substantial price changes. If you’re looking for a mathematical strategy to estimate the price, the stock to flow model, in our opinion, is the most accurate way to do it so far.