How is Bitcoin valued?
Market forces called supply and demand affect the price of bitcoin. The price usually goes down when there are more sellers or vice versa.
Bitcoin (BTC) is a digital currency that is not issued by any government or legal entity, unlike fiat currencies such as the dollar, pound, euro and yen. To generate, store and transmit BTC, a dispersed network of users and cryptographic protocols is required.
Investors, carry out their trade transactions directly instead of using an intermediary. The peer-to-peer network removes trade restrictions and simplifies trade. The world’s first cryptocurrency was first proposed by Satoshi Nakamoto in 2008, which was launched in January 2009.
The number of companies accepting Bitcoin is increasing daily, giving it a real market value. However, this virtual currency has been severely hampered by security issues and volatility. Even at the height of its popularity, it was difficult to find accurate answers to common questions such as what determines the value of Bitcoin, who determines the price of Bitcoin and whether Bitcoin has an intrinsic value?
The same market dynamics, i.e. supply and demand, that influence the prices of other goods and services also determine the value of Bitcoin. Prices are likely to go up if there are more buyers than sellers or vice versa. Moreover, it is necessary to note that the price of Bitcoin is not determined by a single entity and cannot be traded in one place. Depending on supply and demand, each market or exchange sets its price.
What factors can affect the price of bitcoin?
Various factors that affect the price of Bitcoin include supply and demand for BTC, competition from cryptocurrencies and other news, production costs and regulation.
Supply and demand
Those with a background in economics are familiar with the law of supply and demand. However, if you are not familiar with this concept, let us help you understand it. According to this law, market forces of supply and demand work together to determine the market price and quantity of a particular commodity. For example, the demand for an economic good decreases with the increase in price and sellers will produce more of it or vice versa.
An event called Bitcoin halving affects the price of Bitcoin such as a situation where the supply of BTC decreases while the demand for BTC increases. As a result of the high demand, the price of BTC will move upwards.
Furthermore, Bitcoin was created by Satoshi Nakamoto with a hard cap of 21 million BTC. However, miners will no longer receive new bitcoins to confirm transactions once this cap is reached. The block reward cut for four years may not affect the price of BTC at that point. The things that will determine the value of Bitcoin will instead be its real-world applications.
Competition and news
BTC faces competition from altcoins like Ethereum (ETH) and meme coins like Dogecoin (DOGE), which makes portfolio diversification attractive to investors. Any upgrades by existing cryptocurrencies could lead to a drop in the price of BTC unlike a completely different scenario where Bitcoin was the only current digital currency. Because of the media coverage, you may want to buy crypto assets with a positive outlook and ignore the suspicious ones.
Bitcoin production costs include infrastructure expenses, electricity fees for mining, and the difficulty level of the mathematical algorithm (indirect cost). The different difficulty levels in BTC algorithms can slow down or speed up the pace of coin production, which affects the supply of Bitcoin, which in turn affects its price.
Cryptocurrency regulations are constantly changing, from countries like El Salvador accepting it as legal tender to China officially banning cryptocurrency transactions. The price of BTC could drop if there is concern about a particular government decision against cryptocurrencies. In addition, regulatory uncertainty will create fear among investors, causing the value of Bitcoin to fall even more.
Why is the price of bitcoin so volatile?
Uncertainty about the intrinsic value of Bitcoin and the future value of Bitcoin makes it a highly volatile asset.
A decreasing amount of new BTC is generated every day due to the limited amount of Bitcoin. To maintain a constant price, demand must match this rate of inflation. The Bitcoin market is very small compared to other industries, and media coverage alone can push its price up or down. For example, news about Tesla’s willingness to accept BTC will push its value higher or vice versa, making the price of Bitcoin extremely volatile.
Likewise, a tweet stating that the Bitcoin blockchain has been discontinued will cause its value to drop, followed by Bitcoin trading volume. So, given the high volatility, could the price of Bitcoin ever reach zero? Technically, this is possible. For example, the price of BTC is not tied to any fiat currency like the US dollar or any other real-world asset; It is subject to value disruption. However, we have seen that algorithms