What Determines Bitcoin’s Price?


As you likely already know, Bitcoin is a decentralised currency, meaning it is not owned by banks and does not need a third party to complete trades. For this reason, many typical factors that apply to currency value fluctuations do not directly influence Bitcoin, such as monetary policies issued by the Federal Reserve Bank and inflation.


Instead, the coin king’s value is determined by the following:

  • Media, news and buzz.

  • Laws restricting its usage and sale.

  • The number of contending crypto.

  • The expense of creating a Bitcoin via the mining process.

  • Bitcoin's availability and the market's demand.

Like any other asset, the price of Bitcoin is influenced by the combination between supply and demand. In other words, depending on how many individuals are buying or selling it at any given time, the price of Bitcoin will rise or fall. Supply and demand are affected by the above factors, and if you are curious exactly how that price is achieved, we’ll take a closer look at each factor.


Supply and Demand


Bitcoin’s supply has a limit - there are a total of 21 million coins which financial experts project will be mined by 2140. The price increases when supply is limited, and demand is high. Similarly, the price decreases when supply is high, and demand is low. It would help to remember that Bitcoin suffers Block Reward Halving every four years, reducing miners’ rewards by half. As you can see, this gradually makes the coin scarcer, which raises demand and price. As a result, there will be less Bitcoin available in the future, increasing demand.


Adoption


The demand for Bitcoin grows as more individuals and organisations use it, which may cause its price to rise. On the other hand, if adoption slows or stagnates, the cost can decrease. Therefore laws and regulations in various countries impact the price, as these determine the number of people trying to mine or purchase Bitcoin.


For instance, when China officially deemed cryptocurrency illegal in 2021, this resulted in a significant price drop of 5.5% in Bitcoin’s price. There have been long debates on the topic of Bitcoin regulation, its advantages and disadvantages. The absence of laws regarding crypto trading allows it more flexibility and cross-border access. However, in the wrong hands, this digital money can become a massive problem for governments and society. For this reason, more and more people and various jurisdictions are pushing for crypto regulations.


Media Attention


Unsurprisingly, social media, the news and the actions of influential people can dip the scales in favourable and unfavourable directions. A famous example that comes to mind is Elon Musk’s Twitter feed, which resulted in a 20% increase in Bitcoin’s price after Musk changed his bio to “Bitcoin”. All this was based on speculation, and Musk was yet to invest in the crypto market, which he later accomplished using Tesla.


Media and the news obviously influence Bitcoin’s price - great news makes the price rise, while bad news makes it plummet. Several analysts have attempted price predictions based on Bitcoin’s social media buzz, and they have concluded that the more people talk about it, the higher the price.


FUD is a catch-all word for all forms of media coverage or anything that has the potential to generate “Fear, Uncertainty, and Doubt.” FUD materials can greatly influence the behaviour of traders. While hundreds if not thousands of articles have been written on the topic of FUD and how investors should handle fear, doubt and uncertainty in a market as volatile as Bitcoin’s, a significant percentage of individuals still act upon these emotions.


This not only can result in unprofitable decisions for traders but also influences Bitcoin’s price. If you’re dealing with FUD, speak to a financial advisor that can help you determine your personal risk tolerance, create an emergency fund and introduce you to long-term investment strategies.

Credits: Supplied Image; Author: Pixabay;

Market Sentiment


Market sentiment is the overall attitude of investors and traders toward the market. As we explained, positive news or sentiment can increase Bitcoin demand, while negative news or sentiment can decrease demand. Often investors choose to move their money based on market sentiment and their emotions, albeit financial advisers are against conducting these decisions based on emotion.


Network Effects


The value accumulated when more people use Bitcoin is referred to as network effects. As more people trade Bitcoin, its value increases for each individual user. This is because the more individuals use the network, the safer it gets. As a result, the price rises.


Despite being a leading cryptocurrency, hundreds of other coins and tokens compete for investors’ funds. Due to a growth in decentralised finance (DeFi), Ethereum has become a fierce rival to Bitcoin, but there are plenty more trailing behind it - Solana, BNB, and Tether, to name a few. As more people buy alternative coins and tokens, Bitcoin’s price decreases.


Bitcoin Production Costs


Similar to how the price of producing goods affects the retail price of said goods, Bitcoin’s price is closely related to its production costs. Bitcoin’s production price is a combination of the resources used to create it (the systems and power sources needed to mine the coin) and the algorithm’s degree of difficulty.


It takes a lot of processing power to unlock a Bitcoin block and receive a reward. The miner will have to spend a lot of money on pricey mining equipment. Also, the Bitcoin mining process uses a ton of electricity. According to estimates, the Bitcoin mining network consumes more electricity than some small nations. As a result, mining is now reserved for large corporations and entities willing to bear the associated costs.


Global Market Events


There have been plenty of occurrences where Bitcoin would react parallel to global market changes. A recent example is the market crash caused by the COVID pandemic. As the market recovered, so did Bitcoin, even reaching an all-time high. But this isn’t the only example of Bitcoin dancing in a duet with market shocks. While it’s impossible to list them all, here’s another relatively simple example to consider:


Research has proved that whenever crypto whales speculate moving their funds from one cryptocurrency to another, this creates a ripple effect, with plenty of traders following suit. In turn, this causes the price of Bitcoin to plummet, creating a better opportunity for other whales to buy the king coin at a reduced price, leaving a large percentage of traders in shock and at a loss. As you can see, traders also have a role in price fluctuation.


Finally, even smaller events can dip the price in various directions. It might surprise you that weekends also have an effect on Bitcoin’s cost. During these periods, fewer traders are actively following the markets. Very severe price fluctuations in both directions can come as a result.

Credits: Supplied Image; Author: Pixabay;

How To Invest in Bitcoin


Now that you have a better idea of the contributing factors that affect the price of Bitcoin, you might be looking for the best way to invest in cryptocurrency. If you are new to trading, we recommend platforms like Immediate Connect, which can help you get started. Immediate Connect is not just another trading software. Instead, the website provides you with the support of experienced crypto brokers who can help you create your crypto portfolio and allow access to use trading tools and market insight to help you track Bitcoin’s price and develop strategies according to expert analysis.


Is Bitcoin Legal?


Although many nations accept Bitcoin as a payment method, very few have deemed it legal tender. As such, it’s important to do your own research and exercise caution before investing in Bitcoin or any other cryptocurrency and double-check your country’s regulations and tax in regard to crypto trading.


Can The Bitcoin Price Reach Zero?


It is entirely possible for Bitcoin’s price to drop to zero. The perceived worth of a currency determines its price. But Bitcoin would need a significant event to decrease its value down to nothing. In the past, currencies have been exempt from the market following hyperinflation or the adoption of successor currencies, such as the introduction of the Euro in Croatia. But Bitcoin cannot be subject to rampant inflation because the coin cannot be produced on demand, and its price has been fixed.


The Bottom Line


Many variables, including supply and demand, adoption, media coverage, market sentiment, production costs, and network effects, influence the price of Bitcoin. Although it is impossible to foresee the price of Bitcoin in the future with precision, being aware of these critical factors can help investors and traders make better choices when trading crypto. Bitcoin and other cryptocurrencies will have an important place in our financial systems as the world becomes increasingly digitised.