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Top 5 factors influencing the price of Bitcoin

by Scienceooze
price of Bitcoin

Studies have shown that the market price of Bitcoin is indeed closely related to its marginal cost of production.

Bitcoin is a cryptocurrency developed by Satoshi Nakamoto in 2009, and the name is given to one or more unknown creators of the virtual currency. Transactions are recorded in the blockchain, which displays the transaction history of each unit and is used to prove ownership.

Because Bitcoin is not a company, buying Bitcoin is different from buying stocks or bonds, and there is no company balance sheet or form to review. Investing in Bitcoin is different from investing in traditional currencies because Bitcoin is not issued by the central bank or supported by the government, so monetary policies that usually affect the value of the currency, inflation rate, and economic growth indicators do not apply to Bitcoin. On the contrary, Bitcoin price is affected by the following factors:

  1. Bitcoin supply and market demand
  2. The cost of producing Bitcoin through the mining process
  3. Rewards awarded to Bitcoin miners to verify transactions with the blockchain
  4. Number of competing cryptocurrencies
  5. The exchange trades on
  6. Sales regulations
  7. Internal governance

Top 5 factors influencing the price of Bitcoin

Supply and demand

The supply of Bitcoin is affected in two different ways. First, the Bitcoin protocol allows for the creation of new Bitcoins at a fixed rate. As miners process transaction blocks, new bitcoins will be introduced into the market, and the introduction of new coins will slow down over time.

Second, supply may also be affected by the number of bitcoins allowed in the system. This number is capped at 21 million. Once this number is reached, mining activities will no longer generate new bitcoins.

Although Bitcoin may be the most famous cryptocurrency, there are hundreds of other tokens competing for users’ attention. Although Bitcoin is still the main choice for market capitalization, as of January 2020, altcoins including Ethereum (ETH), XRP, Bitcoin Cash (BCH), Litecoin (LTC), and EOS are The closest competitor. Also, the issuance of new initial tokens has relatively few barriers to entry, so Esou has been constantly appearing. The highly competitive field is good news for investors because widespread competition makes prices fall. Fortunately, Bitcoin’s high profile makes it stand out from its competitors.

Cost of production

Although Bitcoins are virtual, they have produced products and incur actual production costs. By far, power consumption is the most important factor. The so-called “mining” of Bitcoin relies on a complex cryptographic mathematical problem that miners are racing to solve. The first person to do so will receive a newly minted Bitcoin and any transaction fees accumulated since the last block. The uniqueness of Bitcoin production is different from other products produced. Bitcoin’s algorithm can only find one Bitcoin block every ten minutes on average. This means that more producers (miners) participating in the competition to solve the math problem will only make it more difficult (and therefore more costly) to solve the problem, leaving a ten-minute interval.

Availability of currency exchange

Just as stock investors trade through stocks such as the New York Stock Exchange and FTSE Indices, cryptocurrency investors also trade cryptocurrencies through Coinbase, GDAX, and other exchanges. Similar to traditional currency exchanges, these platforms allow investors to trade cryptocurrency/currency pairs (such as BTC/USD or Bitcoin/USD).

The more popular the communication, the easier it is to attract other participants, which will create a network effect. By using its market influence, it can establish rules to control how other currencies are added. For example, the “Simple Agreement for Future Tokens” (SAFT) framework was issued to define how ICOs comply with securities regulations. The existence of Bitcoin on these exchanges implies a certain degree of regulatory compliance and has nothing to do with the legal gray area where cryptocurrency operates.

The rapid popularity of Bitcoin and other cryptocurrencies has led regulators to debate how to classify such digital assets. Although the U.S. Securities and Exchange Commission (SEC) classifies cryptocurrencies as securities, the U.S. Commodity Futures Trading Commission (CFTC) considers Bitcoin to be a commodity. Despite the surge in market capitalization, regulators will create uncertainty for cryptocurrency rules. Also, the market has witnessed the launch of many financial products that use Bitcoin as the underlying asset, such as exchange-traded funds (ETF), futures, and other derivatives.

This may affect prices in two ways. First, it provides access to Bitcoin for investors who cannot afford to buy actual Bitcoin, thereby increasing demand. Second, it can lead to price fluctuations by allowing institutional investors who believe that Bitcoin futures are overvalued or undervalued to use their massive resources to bet that the price of Bitcoin will fluctuate in the opposite direction.

Stability of fork governance

Since Bitcoin is not regulated by a central authority, it relies on developers and miners to process transactions and ensure the security of the blockchain. Software changes are driven by consensus, which tends to frustrate the Bitcoin community because basic problems usually take a long time to resolve.

The scalability issue has always been a particular pain point. The number of transactions that can be processed depends on the size of the block, and Bitcoin software can currently only process about three transactions per second. This is not a problem when there is little demand for cryptocurrencies, but many people worry that slow transaction speeds will prompt investors to switch to competitive cryptocurrencies.

The community is divided on the best way to increase the number of transactions. Changes in the rules governing the use of the underlying software are called “forks”. “Soft fork” is related to rule changes and will not lead to the creation of new cryptocurrencies, while “hard fork” software changes will lead to new cryptocurrencies. Past Bitcoin hard forks include Bitcoin Cash and Bitcoin Gold.

Should we invest in Bitcoin?

Many people compare the rapid appreciation of Bitcoin and other cryptocurrencies with the speculative bubble caused by the Dutch tulip mania in the 17th century. Although it is essential for regulators to protect investors, it may take years to truly feel the global impact of cryptocurrencies.

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