As the first cryptocurrency in use, Bitcoin has been traded on the market for over 12 years now. And while a lot of people have become interested in the way it operates, not many understand how its price is determined. In this article, we will take a closer look at Bitcoin, dive into the basics of blockchain, and find out how buying, selling, or holding a cryptocurrency can influence its value.
Factors that shape Bitcoin’s price
The price of decentralized digital assets is not determined by the rules of the traditional banking system. As they are not issued by a single body, but rather represent a peer-to-peer contract between users, standard monetary policy does not apply. Due to its incredibly large volume and popularity throughout the community, Bitcoin’s price is dependent on several factors.
Supply and demand
The first one is its current supply (in circulation) and the market’s demand for it. Fiat money (the traditional national currency) is issued and regulated by the government. One of the Bitcoin protocol’s main features is allowing the creation of new Bitcoins at a fixed rate. As it works on a Proof-of-Work consensus model, this happens through a process you most probably know as ‘mining’. This is essentially how the process of creating new transaction blocks is called among users and it is designed to slow over time.
As the demand for cryptocurrencies increases faster than the supply, the value, and therefore the price of Bitcoin, is supposed to increase, depending on the circumstances and volatility of the market. This belief stimulates holders to keep their existing crypto assets and not engage in much day-to-day trading, thus keeping the price of the coin more stable.
Moreover, the total supply of Bitcoin is capped. The system is programmed to allow a maximum of 21 million coins in circulation and when that ceiling is reached, mining activities will not result in the creation of new Bitcoins. At the end of last year, the supply of Bitcoin reached around 18.5 million. At the current rate of distributing block rewards though, the last Bitcoin is not expected to be mined before 2130 or so.
Looking at price charts one can see a clear pattern in Bitcoin’s behavior over the years. It has its long periods of inactiveness or gradual price drops (called bear markets) followed by abrupt positive price movements (bull market_. History shows that there could be a great correlation between the so-called Bitcoin halving and the soar in value. The Halving is an event that occurs every 4 years. The system has been preprogrammed to slash in half the Bitcoin rewards that miners receive for validating transactions on the blockchain. The reduced supply is a clear sign to investors and traders that the change in price should follow – and as a self-fulfilling prophecy this is often exactly what happens.
Moreover, the availability of a cryptocurrency on the different trading platforms is also crucial for its daily circulation. Most people use the services of third-party exchanges in order to invest in cryptocurrencies. As the largest cryptocurrency by trading volume, Bitcoin is present in almost all of the global digital exchange platforms. With that in mind, its relevance and advantages are also dependent on the regulation that it faces from different government bodies.
The more money that is invested into these types of assets, the more regulations lurk around the corner. News on newly approved taxation laws can have a positive impact since it means that the government views cryptocurrencies as legitimate assets. Cracking down on exchanges or prohibiting merchants from accepting payments in crypto can have a detrimental effect on their price – especially when this happens in large economies such as Turkey or India. However, what these governmental bodies usually go after are the centralized exchanges – Bitcoin in its essence cannot be regulated. This is what makes it especially appealing to those who distrust the government.
The Stock market
Legacy stocks can dictate the overall market trend for crypto. It has been observed time and time again that bull markets and bear markets on the traditional stock exchanges have a correlating impact on crypto since institutional investors often treat cryptocurrencies as stocks that are simply riskier. Whenever they are fearful or full of optimism, this dictates their behavior on both markets. Therefore, keeping an eye on the stock market would be highly advisable.
The price of Bitcoin is determined by many different factors. The mechanisms that stand behind its applications are different from those of government-issued money. If you are planning to invest in crypto, it is recommendable that you first understand the way digital assets work in order to make a better evaluation of the market and potentially get higher returns.
Nothing on this website should be perceived as financial, investment or trading advice. We urge you to do your own research prior to investing and we highly recommend that you consult a certified financial advisor.
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