What Determines The Price of Bitcoin?
- 2 mins
Buying bitcoin is different from purchasing stock or bonds because bitcoin is not a corporation. Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government, so monetary policies, inflation rates, and economic growth measurements that typically influence the value of currencies do not apply to Bitcoin.
Contrarily, the price of Bitcoin is influenced by the following factors:
__Supply and Demand __
Bitcoin protocol allows the creation of new coins at a fixed rate. The introduction of new bitcoins happens when miners process blocks of transactions, but this rate is designed to slow down over time.
In 2020, the bitcoin halving took place. The halving is an event that sees miners receive 50% of the bitcoin mined. This event tends to limit the supply of bitcoin generated and in return demand goes up.
Also, the number of Bitcoin allowed to exist by the system may impact its demand. As of September 2022, Bitcoin reached a supply of 19.1 million out of 21 million pegged to be ever available, representing 91.2% of all bitcoin that will ultimately be made available.
While bitcoin may be the most well-known cryptocurrency, there are hundreds of other tokens vying for user attention. These are referred to as “altcoins” or “alternate” coins.
While bitcoin is still the dominant option concerning market capitalization, altcoins including Ethereum (ETH), XRP, bitcoin cash (BCH), Litecoin (LTC), and EOS are among its closest competitors as of January 2020. Fortunately for bitcoin, its high visibility gives it an edge over its competitors.
__Cost of Production __
While bitcoins are virtual, they are nonetheless produced products and incur a real cost of production - with electricity consumption being the most important factor by far. Bitcoin mining as it is called relies on a complicated cryptographic math problem that miners all compete to solve - the first one to do so is rewarded with a block of newly minted bitcoins and any transaction fees that have been accumulated since the last block was found.
What is unique about bitcoin production is that, unlike other produced goods, bitcoin's algorithm only allows for one block of bitcoins to be found, on average, once every ten minutes. That means the more producers (miners) that join in the competition for solving the math problem only have the effect of making that problem more difficult - and thus more expensive - to solve to preserve that ten-minute interval.
__Availability on Currency Exchanges __
Similar to traditional currency exchanges, these Crypto exchanges let investors trade cryptocurrency/currency pairs (e.g. BTC/USD or bitcoin/U.S. dollar).
The more popular an exchange becomes, the easier it may draw in additional participants, to create a network effect. And by capitalizing on its market clout, it may set rules governing how other currencies are added. Bitcoin’s presence on these exchanges implies a level of regulatory compliance, regardless of the legal grey area in which cryptocurrencies operate.
Bitcoin relies on developers and miners to process transactions and keep the blockchain secure. Software changes are consensus-driven, which tends to frustrate the bitcoin community, as fundamental issues typically take a long time to resolve.
The issue of scalability has been a particular pain point. The number of transactions that can be processed depends on the size of blocks, and bitcoin software is currently only able to process approximately three transactions per second. While this wasn’t a concern when there was little demand for cryptocurrencies, many people worry that slow transactions will push traders towards competitive cryptocurrencies.
The community is divided over the best way to increase the number of transactions.
Now that you understand the variables that contribute to the pricing of Bitcoin. You can now join the league of crypto enthusiasts, and make your first Bitcoin purchase with Patricia. Create a free account now to get started.
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