What Determines the Price of Bitcoin?
Every time we check the official website of Coinmarketrate to see the Bitcoin exchange rate, we are surprised by its volatility and its ability not only to change its direction but also its positions in a matter of hours. There are several factors that influence the price of the leading cryptocurrency by market cap, including:
● Dynamics of the ratio between the number of available tokens and the demand for them: the relationship between supply and demand is always one of the most influential factors in the price of an asset. According to data from Coinmarketcrate.com, of the total BTC supply capped at 21 million coins, nearly 19 million are already in circulation. Thus, due to its limited supply, Bitcoin is considered a scarce asset. The greater the demand, the higher the BTC price will be and vice versa.
● Halving process: to control the evolution of Bitcoin’s money supply and the rate of inflation, the reward that a BTC miner receives for authorizing transactions and securing the network is halved approximately every four years. This process is known as “halving” and is usually followed by a bullish phase in Bitcoin due to the lack of BTC supply.
● Bitcoin blockchain updates: each update to the Bitcoin blockchain that brings more security, flexibility, or speed allows the network to evolve and potentially increase its level of adoption by individuals and professionals. One such update to the crypto world was the invention of the crypto mixer, which became very popular with Bitcoin users. This is why it is worth keeping an eye on the roadmap of major Bitcoin blockchain upgrades, as they usually move the price of the asset.
● Bitcoin acceptance and approval rate: the evolution of the level of acceptance and recognition of the world’s largest token is largely related to its authority, legitimacy, and level of use. The more Bitcoin is accepted, the more it will be used. Therefore, the evolution of Bitcoin’s global adoption rate should determine its price. Today, a lot of exchanges are increasing the degree of Bitcoin acceptance and approval by finding means of securing the experience on the exchange, for instance, by introducing KYC.
● Legal evolution: currently, the Bitcoin and altcoin market is unregulated. However, regulators are increasingly looking to take control of the industry to protect investors from various crypto-related cyber-attacks and scams, as well as to allow companies in the crypto space to develop within a more appropriate legal and judicial framework. Some regulations may be restrictive for investors or the development of the crypto world, while others may provide appropriate solutions. That is why legislation can influence the price of Bitcoin.
● Investor sentiment: the psychology of market participants is an important factor to consider when understanding how the price of an asset like BTC moves, as it greatly influences investor sentiment and guides their actions. Due to the high volatility of its price, one of the most well-known psychological biases of investors is the feeling of FOMO (Fear Of Missing Out), which encourages traders to enter the mass market out of fear of missing out on an opportunity.
● Inflation and interest rates in the world’s largest economies: while Bitcoin is a risky and volatile asset, it is increasingly seen as an alternative that can fight fiat currency inflation. Unlike Bitcoin, which has a limited supply and is not controlled by a central authority, fiat currencies such as the dollar, euro, and others are managed by central banks. Thus, a central bank takes the decision to increase or decrease the money supply of their currency.
With over-accommodative monetary policies in recent years, central banks have varied the cost and availability of money in their economies to support growth. Such support to the economy usually results in a loss of the purchasing power of the local currency.
That is why investors are looking for assets such as cryptocurrencies, the value of which cannot be influenced or manipulated by a central authority. As a result, changes in inflation and interest rates in major economies will not affect the demand and price of Bitcoin.
Finally, it is important to emphasize the fact that last year’s stunning growth of Bitcoin was caused by nothing more than an injection of institutional capital into the crypto industry. This year, Bitcoin is likely also to be bought by governments, not just companies.