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What determines the price of Bitcoin?

What determines the price of Bitcoin?

Bitcoin is a cryptocurrency that was developed in 2009 by Satoshi Nakamoto. Bitcoin is not issued by a central bank or backed by the government. Buying bitcoin is different from buying stocks or bonds because bitcoin is not a company. Thus, there are no corporate budgets or a specific model for auditing.

The main factors affecting the Bitcoin price:

  1. Bitcoin supply

The supply of bitcoin has been dwindling since its inception. The protocol designed for bitcoin allows new bitcoins to be created at a fixed size, and that rate is designed to slow over time. The directed reward given to miners decreases every four years, which helps drive up its price because it means the supply of the cryptocurrency decreases over time.

  1. Bitcoin demand

While Bitcoin has not found a valid dimension as a medium of exchange, it has attracted the attention of retail investors. Bitcoin demand position changes based on economic and geopolitical considerations.

  1. Bitcoin production cost

The cost of production is roughly the sum of the direct fixed costs of the infrastructure and electricity required to mine the cryptocurrency and the indirect cost related to the difficulty level of the algorithm for that coin. Bitcoin mining consists of two miners competing to solve a complex math problem. The first miner to do so wins the reward for newly minted bitcoins and any transaction fees accumulated since the last block was found. Reaching a solution to the problem requires great power in the form of processing power.

According to estimates by some websites, the electricity consumption of bitcoin mining is equal to or more than that of entire countries.

  1. Competition with other digital currencies

As of 2021, Bitcoin has dominated trading in the cryptocurrency markets. But its dominance has waned over time. In 2017, Bitcoin accounted for more than 80% of the total market capitalization of the cryptocurrency markets. By 2021, this share has fallen to less than 50%. For example, Ethereum has emerged as a formidable competitor to Bitcoin due to the boom in decentralized finance (DeFi).

  1. Organizational developments

Bitcoin was released in the wake of a financial crisis that was precipitated by loosening of regulations in the derivatives market. The cryptocurrency itself is still mostly unregulated and has earned a reputation for its cross-border ecosystem. The lack of regulation means that it can be used freely across borders and is not subject to the same government-imposed controls as other digital currencies. But this also means that the use and trading of Bitcoin can lead to criminal consequences in most financial jurisdictions.

  1. Bitcoin news and developments

Regulatory news can move cryptocurrency prices significantly. For example, the conversion and split from Bitcoin to Bitcoin Cash in August 2017 caused price volatility and pushed the valuation of both currencies to new highs.

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