What Determines Bitcoin's Price?
Why does the Price of Bitcoin Change so Often?
FAQ about the Value and Price of Bitcoin
Have you ever wondered how is Bitcoin’s price determined? Or how do Bitcoin and other cryptocurrencies get their value even though they are outrageously volatile?
If you have, you are not alone. Seeing that it's not strange for the price of Bitcoin to go up or go very low. But what affects or determines crypto prices? Is it the same as other fiat currencies like dollars? Or is there something else that affects the value of bitcoin?
Let’s find out!
Bitcoin price is not determined like fiat currency or traditional money. It's not backed by the government. Neither is it issued by the central bank. Because of this, it does not behave like those fiat currencies. Neither is it affected by factors that would naturally affect them.
Factors like inflation rates, monetary policies, and so on.
Bitcoin, like most cryptocurrencies, is seen mostly as a commodity used to store value. Its price is mostly affected and determined by:
All of these are what determine Bitcoin's price.
One important factor that contributes to the price of Bitcoin is supply. If Bitcoin supply was low, the price would be high. But if the supply is very high, then you should expect to see very low prices.
The supply of Bitcoin is going to forever be 21 million. With a designated amount of Bitcoin created in a year. And half of it will be created in the next four years. A process is known as halving.
With the supply of Bitcoin reducing in the future, its demand would increase and its prices.
This is almost compared to when there is an increase in farm produce. When the yield is very high, the price is low. But when crops are scarce, their prices become so high.
The demand for Bitcoin is among what determines Bitcoin price. But unlike supply, when demand is high, the price is high. This demand is pushed by social media hype. And also predictions from financial analysts or business tycoons.
The demand is also affected by the supply. When there is a reduced supply, there is an increase in demand and a price increase.
Like every other commodity, the cost of production affects the price of Bitcoin. The price of Bitcoin is directly associated with the cost of production.
So how do you get the cost of production of Bitcoin?
It's quite simple. You'll have to add the cost of infrastructure and the electric power used in mining Bitcoin. You need to add another one, which is the cost closely linked to the algorithm's difficulty.
The higher the costs of all these. The higher the value of Bitcoin.
Bitcoin is very popular. But other very popular cryptocurrencies compete with it in the stock market.
But for 2022, it dominates the market, even though at some point it waned.
But in 2017, Bitcoin dominated four-fifths of the entire crypto market. Although it dropped by 2022.
This was due to the entrance of other alternative crypto coins into the crypto markets.
Even though these cryptocurrencies are taking investment dollars out of the Bitcoin market, their increasing competition lures more investors into bitcoin's ecosystem.
Bitcoin became very popular following a crisis in the financial world. This was caused when the derivative market relaxed its regulations. Bitcoin itself stayed without regulations. And has become popular in the crypto-unregulated ecosystem.
Although being unregulated gives cryptocurrency lots of benefits. It also comes with a lot of disadvantages. Because it is without regulation, Bitcoin is not used across every border.
Another factor that can influence the price of Bitcoin is media coverage. Of late, social media hype has played a significant role in the sudden increase in cryptocurrency prices.
Most especially are postings on social media from very popular celebrities and investors like Elon Musk. Most times, media coverage works against bitcoin prices. Other times, they help to surge the price to incredible highs.
Many of the factors that help determine the price of Bitcoin also affect its volatility. Although they have a considerable play on Bitcoin, they are not the only cause.
The volatile nature of Bitcoin is not a big concern for bitcoin investors or traders. But it creates a kind of negative effect on non-participants, which causes them to see Bitcoin as just another speculative investment.
Now you know what determines the value of bitcoin and what affects bitcoin price. Supply, demand, and media affect the price of Bitcoin price the most. But the other factors contribute considerably to determining Bitcoin price.
The main reason Bitcoin has value is that it can be used as money. And it has all the characteristics of a fiat currency. It is divisible, durable, fungible, recognizable, and scarce. It does not rely on its physical properties like silver or gold. Neither is it governed by a central bank.
Bitcoin is valued by the market forces. When many people want bitcoin, the price goes high. When no one wants it, the price is low.
The value of Bitcoin is publicly available to anyone and at any time. You can always stay updated by checking any of the popular crypto exchanges. You can also track Bitcoin value using crypto websites, brokerages, or crypto news.
Bitcoin price is determined by supply, demand, and cost of production. And also by the number of competitors, regulations, and media coverage.
Bitcoin reached its highest price in October 2021 when it hit $66,878 for just one Bitcoin. But this price has been dramatically reduced by more than half. This proves the volatile nature of Bitcoin.