What Influences the Price of Bitcoin?
Bitcoin’s price has always been volatile. Despite this instability of the price, in the long term, the value of Bitcoin has increased significantly since its inception in 2009.
What influences the price of Bitcoin? What are the factors that have a role to play whether Bitcoin prices rise or fall?
Supply and Demand
As with all other goods, supply and demand are responsible for fluctuations in the price. The rate at which Bitcoins are produced is controlled via its internal protocol, and the overall supply of Bitcoins that will ever be produced is finite with exactly 21 million coins. The demand for Bitcoins fluctuates and depends on major participants in the market. If the demand goes up, so does the price, if the demand falls, the price of Bitcoin falls as well.
Trust and Image
First, there is the issue of trust, and with it comes the trust of high networth individuals and company bosses whose public statements can have a huge impact on the price of Bitcoin. If high networth individuals and celebrities say something positive about Bitcoin, the demand will go up and the price will follow. If large companies accept Bitcoin, so will large population groups who deal with these companies. The opposite will happen when trust and image are affected negatively.
Competition
Bitcoin, albeit the most well-know cryptocurrency, is not the only one. There are many other cryptocurrencies in circulation, some of which are Ether, Litecoin, Binance Coin, Tether, Solana and Dogecoin. Ethereum, for example, has experienced massive growth and is said to be one of the top cryptocurrencies.
BTC-Exchange-Traded Funds (ETFs)
BTC-ETFs allow investors to participate indirectly in the Bitcoin market by holding shares in a fund that tracks the Bitcoin price. A BTC-ETF tracks the price of Bitcoin futures, and not Bitcoin itself. The price of Bitcoins is affected by the greater demand for Bitcoin by institutional investors who invest in these funds.
Legal Regulations
Bitcoin is not regulated or controlled by government institutions, which made governments react in several ways. China banned both the trading and mining of Bitcoin and issued its own e-currency. El Salvador went the other extreme and adopted Bitcoin as legal currency. The EU established MiCA, the „Markets in Crypto-Assets“ framework, to create licencing requirements for crypto and set stronger consumer protection standards. The US also announced that it would bring more regulation to the cryptocurrency market. When governments announce their aim to regulate the cryptocurrency market in their countries, the price usually reacts negatively.
Political Instability and War
When there is political instability or conflict between governments, investors generally become more risk-averse and invest in safe haven-assets, such as gold. On the one hand, Bitcoin is hailed as liquid gold as its scarcity protects against inflation. On the other hand, in times of crisis, Bitcoin mostly reacts like shares and loses value. The recent military conflict and war that broke out between Russia and the Ukraine has shown that investment in crypto is still seen as high risk. Since then, however, lower values of fiat currencies, such as the Russian Ruble and the Ukrainian Hryvnia, as well as Russia having been banned from SWIFT, the international money transfer system, have increased trading volumes in Bitcoin, causing the price to rise again. The last few years have shown that Bitcoin recovers quickly after a crisis-related loss in value and that in the medium term even emerges stronger from a crisis.
References:
- Bitcoin Price Prediction for 2021 to 2025, 2030 and 2050 | Libertex.com
- www.analyticsinsight.net/top-10-cryptocurrencies-to-buy-and-hold-forever-a-permanent-investment/
- www.forbes.com/advisor/investing/best-crypto-exchanges/
- www.coindesk.com/policy/2021/10/20/the-view-from-brussels-how-the-eu-plans-to-regulate-crypto/
