Business

Title: What drives the price of Bitcoin and why is it so volatile?

Every day, more companies adopt Bitcoin, increasing its genuine market worth. As more companies accept Bitcoin, how worthwhile the token is shifts from that of perceived value to an asset with a use-case. However, security concerns, regulatory hurdles, and volatility have hurt the digital currency, and investors are still weary of the wild price swings. It’s difficult to pinpoint what exactly it is that determines Bitcoin’s worth, who determines Bitcoin’s price, and if Bitcoin has inherent value.

Overall, however, There are a few factors that are at play when it comes to the price of Bitcoin (and what makes it so volatile):

Regulation

Across the world, the laws governing cryptocurrencies are continuously shifting. Countries like China and Egypt have officially outlawed cryptocurrency transactions and others like El Salvador have adopted it as legal tender. Any news of a certain government’s plan to ban cryptocurrencies can cause fear in investors, which can bring the price of Bitcoin down. 

The Bitcoin Halving

Every four years (approximately), the Bitcoin Halving occurs which means the reward for mining the cryptocurrency is halved. This is in place to make sure the supply of Bitcoin isn’t minted at once, and to try and stabilize the demand with the supply. Historically, the Bitcoin Halving has impacted the value of Bitcoin leading to an price increase several months before and after the event.

Supply and demand

The law of supply and demand in the market means the price of something is determined by how much is available and how much people want it. As the price of an asset rises, for example, sellers will make more of it, and vice versa, as the demand drops.

Bitcoin has a hard cap of 21 million BTC meaning the token has a fixed supply. Once that maximum has been hit, miners will not be able to receive new Bitcoin for validating transactions. The price of Bitcoin then will be determined not by how many are being created, but rather by its use-case and purpose in the financial ecosystem.

Macroeconomic factors

While the price of Bitcoin might not be directly linked to other assets, there is a growing correlation between other classes, such as tech stock. This means that the price of other sectors can have an impact on the value of Bitcoin and other cryptocurrencies in the market.

The cost of mining

Bitcoin production costs include equipment – which is constantly becoming more expensive – and electrical costs. The manufacturing rate of Bitcoin can slow or speed up as the mining difficulty shifts. This has an influence on the cryptocurrency’s supply, which has an impact on the price.

Altcoins and competition

Because cryptocurrencies compete with Bitcoin for market dominance, investors lean towards portfolio diversity. Many new and popular trading tools like Bitcoin Motion are offering traders an opportunity to trade multiple different cryptocurrencies simultaneously. Years ago, Bitcoin used to be the only digital currency but now there is an entire market that attracts investors. The decline in Bitcoin trading dominance can lead to a decline in its value. 

While Bitcoin might have a reputation as a volatile asset, the return on investment over the years has outperformed any other asset class. Even during a bear run, Bitcoin price is still higher than it was before the previous bull rally – which indicates that the price of the digital currency is set to climb further as the token supply is mined. 

Investing in Bitcoin when the price is lower can mean that you “buy the dip”, giving you an opportunity to sell when it is worth more and make a profit off the investment. It also means you can buy Bitcoin to hold and see where the market goes with a focus on a long-term investment.

 

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