Unlike fiat currencies, like USD and EUR, a cryptocurrency’s value is not established by entities like financial institutions. Instead, the value of a digital currency like Bitcoin is determined by several factors, including supply and demand. Simply put, BTC value is influenced by the price individuals are willing to pay.
There are so many instances where the price of a particular cryptocurrency goes up as a result of high demand and when the price drops because of poor demand. This is not surprising, not even in the case of the world-largest cryptocurrency by market capitalization, Bitcoin. But why? We will detail it for you in the following.
So, keep reading for insightful information on factors moving Bitcoin price and further recommendations on handling the cryptocurrency’s volatility
In what manner is Bitcoin valued?
You may wonder what makes Bitcoin (or altcoins) so valuable since it is notoriously volatile. Well, market forces named demand and supply determine this digital currency’s price. BTC price normally increases when there are fewer traders or vice-versa.
In the first place, Bitcoin is a digital coin, meaning that it is not backed by a government or issued by a financial institution, in contrast to fiat currencies. Thus, factors such as inflation rates, monetary policy tools, and economic development measurements have no power over Bitcoin but only over the pound, euro, dollar, or other fiat currency. BTC is more like a commodity; to create, store, and move it, some cryptographic protocols and a dispersed network are necessary.
Transactions on the Bitcoin blockchain are carried out directly without the intervention of a third party, so there are no trade restrictions that could act as an impediment. Plus, the peer-to-peer network displays the transaction history for every unit and confirms ownership, which is not the case for fiat money. Satoshi Nakamoto, the creator (or creators) of Bitcoin, developed this virtual currency, planning that it would be used to store value, and given the actual status of BTC worldwide, we can only agree that their intentions have materialized. Increasingly more companies have started to embrace BTC, conferring it a real market value.
Nonetheless, several factors decide Bitcoin’s value, and some of the most significant are the coin’s supply and demand.
Understanding the factors influencing BTC value
Here we will try to explain the aspects impacting Bitcoin’s price in a nutshell:
Supply and demand
These market dynamics work together to decide the quantity and price of a particular commodity. For instance, the demand for a cryptocurrency drops as the price rises, and vice-versa. But this principle is a stranger to no economic good, as it applies in almost every field.
Satoshi Nakamoto decided that there would only ever be 21 million BTC, so once this cap is reached, miners will no longer be able to mine and receive new coins for verifying transactions. The last Bitcoin is expected to be mined by 2140, which is pretty far from now, enough time for the network to evolve and become more globalized. Moreover, Bitcoin’s protocol only makes it possible for new coins to be made at a fixed rate and only in a certain amount per year. Throughout time, the creation of new Bitcoins is estimated to slow down, which should make the asset even more valuable. And while there is enough BTC supply, you would better learn how to buy cryptocurrency and expand your portfolio now than wait until too late. Who knows, with the right strategies in place, you may grow rich, just like many Bitcoin millionaires out there.
On the other hand, demand is influenced by Bitcoin’s utility. The project has recently gained so much attention that it has quickly started to be adopted by thousands of businesses globally and even made a legal tender in countries like El Salvador and the Central African Republic. Besides, many institutional and retail investors are interested in BTC investments, increasing the cryptocurrency’s price considerably.
Cost of production
The production cost of a cryptocurrency is nothing but the expenses for electricity and infrastructure necessary to mine it (fixed cost) and those related to the complexity level of its algorithm (indirect cost). The many levels of complexity in Bitcoin’s algorithms can decelerate or accelerate the coin’s creation pace, directly influencing supply, which, in turn, impacts its value. In addition, Bitcoin mining involves several miners racing each other to guess the complex mathematical puzzle often called a hash. Solving the hash implies more advanced equipment and, consequently, more electricity; hence, more production costs. Objectively speaking, it is pretty logical and, if we do not cross the line, only normal to be so.
The time Bitcoin was the only existing cryptocurrency has passed; today, thousands of digital currencies (altcoins) are in circulation. Ethereum, Solana, and Dogecoin are serious competitors of Bitcoin, as they have seen a lot of improvements lately. BTC indeed dominates market trading, but the other coins also have promising capabilities; hence, those behind the project must constantly remain vigilant and seek to reinvent the rails of modern economic infrastructure.
There appears to be a lack of clarity regarding the status of cryptocurrency. The Commodity Futures Trading Commission claims that cryptocurrencies are commodities just like gold, while the Securities and Exchange Commission (SEC) argues for their status as securities like bonds and stocks. This uncertainty has manifested in many ways, so some countries accepted Bitcoin as a legal tender while others banned it. In other countries, however, there is a lack of regulatory status, meaning that cryptocurrencies could be used freely across borders.
Nevertheless, increasingly more governments have become aware of the problem and insist on some form of regulation.
Surprisingly or not, the media has a great influence on buyers who are weighing their investment portfolio. No one is interested in buying a coin with a negative outlook or a shady future. Well, the media decides whether a particular cryptocurrency is worth it or not, spreading the news about it, good or bad. If any of the aforementioned factors suffer changes, the media will publish and disseminate the news to the masses.
What the future holds for cryptocurrency only remains to be seen.
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