Bitcoin is not a corporation, so buying bitcoin is totally different from buying a bond or stock. And unlike all traditional currencies, it is not backed by the government and it is issued by any central bank, so the factors that influence the value of currency such as inflation rates, monetary policy, and economic growth measurements do not apply to bitcoin.
What are the Factors that Affect the Prices of Bitcoin?
Demand and Supply Rate of Bitcoin in the Market
There are two different ways the supply of bitcoin is impacted;
First, the way bitcoin protocol is, bitcoins are being created at a fixed rate. Anytime miners successfully process blocks of transactions, new bitcoins will be introduced into markets, and rates at which new bitcoins are introduced into the market is designed to slow as time goes on. These most times create scenarios where the rate of supply of bitcoin is lower than the rate of demand for it, which can drive up the price.
Secondly, the number of bitcoins allowed by the system can have an impact on supply. This number is always capped at about twenty one million, when it reaches this particular number, no new bitcoin will be created by mining. So at this point, prices will solely depend on whether it is considered legal, practical, and in demand, and this can be determined by the other cryptocurrencies’ popularity.
Competition
Even though Bitcoin is the most popular cryptocurrency, there exists also hundreds of tokens out there as competition. Some of its closest competition as of January 2020 include LiteCoin (LTC), bitcoin cash (BCH), XRP, Ether (ETH), and EOS. Some other new ICOs – Initial Coin Offerings, also keep staying afloat, mainly because of a few barriers for entry. These much widespread of Bitcoin competitions do affect Bitcoin prices as it keeps the prices down. But due to its high visibility, Bitcoin has an edge over its competitors.
Cost of Production
Even though Bitcoin productions are virtual, they actually incur a real cost of production, one of the important ones is electricity consumption. The process of producing Bitcoin is called mining, and it relies heavily on a complicated cryptographic math problem, miners have to compete to solve these problems, and the first miner to do so will be rewarded a block of newly minted bitcoins and they are also rewarded transaction fees that must have been gotten since they found the last block.
The unique feature about bitcoin mining is that unlike goods production, bitcoin’s algorithm will only allow for one block to be found, and this happens averagely every ten minutes. What this means is that the more miners that participate in solving the algorithm will tremendously have the effect on the problem, making it more difficult, at the same time, more expensive, because the ten-minutes interval must be preserved. Research shows that the price of bitcoin is very related to the cost of production.
Currency Exchanges
Just like investors trade their stocks over some indexes such as FTSE, NYSE, and Nasdaq, Bitcoin investors helps you trade your Bitcoins. Similar to the traditional fiat currency exchanges, so many platforms allow investors to trade cryptocurrency and traditional currency in pairs for example, BTC and USD or BTC and GBP. If you are interested in investing, then Bitcoin Compass trading app Will identify opportunities for you cryptocurrency market.
How does this affect Bitcoin prices? The higher the bitcoin exchange transactions, the higher the participants becomes, creating a network effect.
Governance Stability and Forks
As Bitcoin and other cryptocurrencies are not being governed by the government, it does rely on miners to keep processing the transaction and at the same time keeping the blockchain secured. One of the major issues the Bitcoin community faces is the changes to software which the decision must be consensus, this always takes a very long time to resolve. One of these issues is Scalability – We said earlier in this article that the number of Bitcoin transactions which can be processed by miners depends on size of blocks, the bitcoin software available can only process about 3 transactions per second. If there is little demand for cryptocurrencies, this might not be an issue but when the time comes that there is far more demand, the transaction process might be slow and this might lead to investors opting for competitive cryptocurrencies.
A factor or governing rule that decides if there should be an increase in the number of transactions is a software calledforks.
There are two types of forks:
Soft fork: This is a rule that pertains to changes that do not result in the creation of a new cryptocurrency to the market,
Hard fork: This is software changes that result in the new creation of cryptocurrencies. Bitcoin cash and bitcoin gold are both the result of past hard forks.
Other factors that might affect the change in the price of bitcoin include:
· The exchanges it is being traded on
· Bitcoin miners rewards
· Its internal governance
· Regulations governing its sale
Anyone that wants to get involved in any bitcoin transaction should be conversant with all these factors and put them into consideration.
