Bitcoin is the first and main cryptocurrency available in the crypto space with the largest market cap and volume. It was developed in 2009 by Satoshi Nakomoto, the name given to the unknown creator or creators of the digital coin. Bitcoin transactions are based and recorded in the Blockchain. This is used in proving the ownership of each of these coins as it also records the transaction history of each unit. Bitcoin price has also varied over the years, with its highest boom occurring in 2017.
Like every other cryptocurrency, Bitcoin is decentralized. This means that the central bank or the government does not back it up. This is unlike the fiat currency or stocks that have the government’s backing and regulations controlling it. Hence, Bitcoin is not affected by monetary policies, inflation rates, or other economic policies and measurements. However, the price of Bitcoin still varies in the market. This is determined by certain factors as will be considered below:
DEMAND AND SUPPLY
The demand and supply level of bitcoin is the major factor that affects the price of the coin in the market. This is determined in two different ways. The first is the action of the miners in the crypto space. Miners are those who make new cryptocurrencies available in the market at a fixed rate and get rewarded for it. This is done through the processing of blocks of transactions. The growth rate has slowed down over the past years; it’s gone from 6.9% in 2016 to 4.4% in 2017 and 4.0% in 2018.
The reason behind the slow growth rate is because of the bitcoin halving block rewards offered to miners. This is a regulated way to increase the demand for Bitcoin and cause artificial inflation in the cryptocurrency space.
Another factor affecting the demand and supply of bitcoin in the market is the regulated number of bitcoins allowed to exist in the market. The total number is 21 million, and once this number is reached, miners will no longer be able to generate new coins. As at the end of 2019, there is already 18.1 million bitcoin in the system. However, the 21 million is estimated to be reached at the end of 2140. Once the 21 million is in circulation, the price will be dependent on the practicality, legality, and the in-demand of the coin and other cryptocurrencies.
CHALLENGE FROM COMPETITORS
Although Bitcoin appears to be the strongest coin in the crypto market with the largest market cap, some altcoins are vying for the same top position as Bitcoin. Some of the main altcoins close to Bitcoin include Ethereum, Ripple, Litecoin, and Bitcoin Cash. These are becoming more popular every passing day. The increase in strength can largely affect the price of Bitcoin in the market.
Also, the ease of creation of initial coin offerings (ICOs) is causing a massive influx of newer currency types every day. These potential competitors can also affect the price of Bitcoin in the market. However, the strength of Bitcoin is still giving it an edge over the other digital currency types available in the market.
MARGINAL PRODUCTION COST
Although Bitcoin is not like other commodities, the cost of producing a single bitcoin can still affect the price in the market. Bitcoin miners have to use massive, expensive equipment with high energy consumption. This is to make one bitcoin available in the market every 10 minutes.
Mining involves solving a complicated cryptographic math problem. The first miner to solve it wins the newly minted bitcoin and the other transaction fees accumulated since the last bitcoin block. This marginal price involved in the production goes a long way in affecting the bitcoin market price.
VARYING REGULATIONS
The entrance of bitcoin and other cryptocurrencies into the financial market space caused a bit of confusion among the various regulatory bodies. For instance, the Security and Exchange Commission (SEC) considers crypto as securities. The U.S. Commodity Futures Trading Commission (CFTC), on the other hand, considers crypto a commodity. This has caused some kind of uncertainty for the currencies. However, the market is still expanding irrespective of its name. Various financial products are being developed with bitcoin as their underlying assets. Some of the products are futures, exchange-traded funds (ETFs) as well as other derivatives.
The implication of this is that investors can opt for this product instead of getting Bitcoin, hence increasing the demand and price of the cryptocurrency. Also, some big investors can downplay the idea behind the financial products. Hence, predicting the price moving in the opposite direction. This can, in turn, affect the price of Bitcoin in the market.
STABILITY AND SOFTWARE CHANGES
Any government does not govern the crypto market, and changes in software as well as ensuring stability is achieved through consensus. This is becoming a big issue in the bitcoin market as major matters take a relatively long time to get resolved. For instance, the scalability of the market has been a major issue for quite some time. The fact that only three transactions can be processed within a second is beginning to slow bitcoin transactions down. This is due to the rapid expansion in the Bitcoin market.
Since the government cannot make an immediate resolution to solve this, the market, whose resolutions are consensus-driven, cannot enjoy a swift solution to this issue. This is causing most people to anticipate investors moving out of Bitcoin. These investors can channel their assets into other smaller but faster coins. Hence, this is another factor that can cause a massive price fluctuation of Bitcoin over time.
CONCLUSION
Other factors, such as the popularity of trading and exchange platforms, can also affect Bitcoin’s price in the market. This makes it easier to get some currencies listed ahead of the other ones and this can markedly affect the market prices. However, since its inception, Bitcoin has always maintained the top spot among its competitors in the market. Hence, most analysts and investors still predict a brighter future for the coin.
ABOUT THE WRITER
I am John Oladokun Opeyemi. Follow me on Facebook, Twitter, Instagram to access several updates on Business, Work, Marketing, Freelancing, and How to Build a Reputable/Profitable Brand or Business on the Internet.