Launched in 2009, Bitcoin is a cryptocurrency that was developed by Satoshi Nakamoto (unknown creator of the currency) that operates very differently from traditional currencies or fiat. A blockchain is used to record all the transactions, show the transaction history of each unit and to prove ownership.
Unlike traditional currencies, trading of Bitcoin is a bit different. The monetary policy, inflation rates, and economic growth measurements do not apply to Bitcoin as it is not issued by a central bank or backed by a government. The currency is decentralized and is maintained by a network of equally privileged miners.
The cryptocurrency has shown an overall upside trend with slight downfalls in between in its valuation since its advent. But the question arises ‘what determines Bitcoin’s price?’. Bitcoin’s value is dependent on multiple factors, which include:
- Demand and supply of Bitcoin
- Cost of mining a Bitcoin
- Number of competing cryptocurrencies
- Exchanges it trades on
- Regulations governing its sale
- Media influence
There is a fixed number of 21 million units of Bitcoin that will ever be created. With every passing year, new Bitcoins are being released at a slower rate. Case in point: growth rate has decreased from 9.8% (2015), to 6.9% (2016), to 4.3% (2017). So as the supply is getting reduced and there is an increase in its demand, the value of bitcoin is bound to increase.
Every Bitcoin that is mined involves a complicated procedure of cryptographic math problems that miners all compete to solve. When more miners join in the competition of solving the problem first, the problem gets more difficult and thus more expensive. This overall increases the hash rate of the blockchain which resultantly demands a high hash power for faster computing which overall increases the chances of adding a block while increasing the mining cost. This cost of mining a Bitcoin also influences the value of Bitcoin in the market.
The innovation of cryptocurrency has led to many cryptocurrencies being traded in the market. Bitcoin, the famous of all, has its numerous competitors: Ethereum, litecoin, Dogecoin, and Peercoin to name a few. Widespread competition has divided the investors and helps to keep the prices down. Bitcoin has had an edge over its competitors due to high visibility.
After a rapid rise in the popularity of cryptocurrencies, there is confusion over which regulator will set the rules for cryptocurrencies that have created uncertainty. Bringing in regulation affects prices in two ways. First, it increases demand as it provides a guarantee of security to retail investors who are speculative about bitcoin. Second, it can reduce price volatility by allowing institutional investors who believe bitcoin futures are overvalued or undervalued, to use their substantial resources to make bets that bitcoin’s price will move in the opposite direction.
The media influence has a certain impact on Bitcoin’s value as well. Promotion of the Bitcoin can attract more investors thereby increasing the price of it. During the famous bull run of 2017, the google searches for the word bitcoin were sky high, which was also termed as one of the boosting factors by some analysts. On the contrary, a negative promotion on the media can discourage investors from decreasing the value of the Bitcoin.
All in all, unlike fiat and traditional stocks, bitcoin operates on a different plane that is affected by the accumulation of different factors. Although these factors have made bitcoin volatile for a long period now, it is predicted the core fundamentals of bitcoin i.e. adoption will kick volatility out of the market and introduce stability at last.