Bitcoin is trending at the moment as a digital currency whose price keeps going up. However, many people don’t understand the factors that may contribute to digital currency price movements. If you intend to invest in Bitcoin, it’s critical to understand the things that influence its price motions. To help you comprehend the factors that influence Bitcoin’s price shifts, please keep reading.
Factors affecting the price movements of Bitcoin
Whereas one can use various parameters to evaluate the futures and price movements of traditional shares at stock markets, some analysts may find it challenging to use the same elements to determine BTC price changes. Remember, BTC is a relatively new digital currency that doesn’t represent any company, unlike the shares traded at the stock exchanges that represent listed companies. And sometimes, it’s difficult to determine the reasons that cause its price shifts. However, this doesn’t mean that there are no underlying factors that lead to BTC’s price motions. Some of the factors include:
Supply and demand
Supply entails the quantity of Bitcoin available versus the amount the market needs. As regards the BTC, two critical factors influence its supply. The first element has to do with the Bitcoin protocol, which allows creating the digital currency at a controlled rate. Upon processing the current transaction blocks, new Bitcoins get into the market. And the introduction of the new currency is done at a controlled speed. The release of BTC in the market in small amounts creates an element of scarcity. And due to scarcity, the demand for Bitcoin goes up. And this has the general impact of driving up the virtual currency’s price.
Secondly, according to the Bitcoin code, the number of currencies that the miners are supposed to mint cannot exceed 21 million. Upon attaining the coded number, BTC mining activities will cease. When the production activities end, Bitcoin prices will be determined by other factors, such as the legal environment, the digital currency’s popularity, and the public demand.
Although Bitcoin is the most popular option globally, other digital currencies may pose stiff competition. Virtual currencies like Ether (ETH) and Litecoin (LTC) are also crying for market attention. The competition from these other tokens has an impact on the overall price of Bitcoin. For instance, some clients may want to diversify their investments by investing in the market’s available digital currencies. As a result of the competition, Bitcoin’s price may come down to accommodate more clients.
Cost of Production
Like any processed product, Bitcoin production incurs various costs, like energy charges. Bitcoin mining also depends on a complex cryptographic maths issue that miners should solve. Miners compete with one another to solve the problem. The successful one is rewarded with a new block and all the expenses that led to its production. Unlike other production processes that allow mass production, Bitcoin allows only a single block to be produced once every 10 minutes. And if many miners join the competition of producing a block, the maths problem will be more complicated. This means that the cost of its mining will spike.
Due to COVID 19, many countries have imposed strict regulations to minimize its spread. As a result of these controls, economic activities have almost come to a standstill. Stock market activities are all-time low, and prices of shares of listed companies have nosedived. Faced with this dilemma, many individual and institutional investors are looking for alternative investment opportunities. For such investors, Bitcoin has proved to be the best option.
Therefore, digital currency prices are going up due to the rising demand from institutional and individual investors looking for alternative vehicles of investment. Furthermore, specific platforms like yuanpay group have simplified buying and selling the digital currency.
Availability on currency Exchanges
Digital currency investors trade virtual currencies on different exchanges like Coinabse and GDAX. These platforms allow investors to trade digital currencies in pairs, for example, BTC/USD.
Popular platforms can attract multiple participants who can form a strong network. The exchange can take advantage of its power in the market to articulate new regulations, stipulating how different currencies should are included. Exchanges with Bitcoin can attract more participants because such platforms are deemed to have complied with various rules governing the digital currency marketplaces.
Hedge against Inflation
According to the original programming, Bitcoin’s production is capped at 21 million. And the good thing about virtual currency is that it’s decentralized, meaning it isn’t bound to any external rules. Furthermore, Bitcoin’s mining isn’t dependent on the prevailing political climate. The attributes mentioned above make digital currency the best hedge against inflation.
Governments may articulate policies that may lead to printing more fiat currencies, which may inflate the economy. During inflation, investors’ assets may lose value. Bitcoin has proven to be the best hedge against inflation because its production is predictable and isn’t attached to the prevailing political climate. This is why many institutional and individual investors are considering BTC as the best hedge against inflation.
Because of its capacity to hedge against inflation, big firms have announced their intention to invest in digital currency. Some of the big names intending to invest in Bitcoin include Tudor Investment and Guggenheim Partners.
The behavior of Big Companies
Some big firms have expressed their intention of buying Bitcoin because of its multiple strengths. Based on these pronouncements, the price of Bitcoin may go up because many individuals and firms may want to taste this digital currency with multiple strengths, like enabling fast international payments.
Regulations and Legal Matters
Digital currencies primarily operate in an unregulated environment. This attribute makes them a better option for clients who may need minimal exposure to legal hurdles. Besides, people conducting international trade want an option that is quick and hassle-free. And here, digital currencies hit a big plus because of their decentralized nature.
Governments and banks control standard payment options. These entities must verify each transaction. And the approval procedure may take time to accomplish. Many businesses and individuals find digital currencies a better option because of the high speed of transactions, being affordable, and minimal legal exposure. This is one factor that’s affecting price movements at the moment.
Due to the popularity of Bitcoin, different regulatory institutions have expressed their intentions to control it. Although some people may regard this step negatively, it may lead to a spike in Bitcoin value. The confidence of some individual and institutional investors may go up due to regulating the digital currency.
Forks and Governance Stability
Bitcoin is a decentralized platform that depends on developers and miners to process payments and keep the blockchain safe. Some changes to the underlying technology may cause anguish because essential matters take along to solve.
Scalability is a significant headache that BTC miners and the community encounter. The software technology on which BTC operates can only process three transactions per second. Initially, this wasn’t an issue of concern. But as time elapses, demand for BTC has gone up. Due to the prevailing situation, currently, there is genuine anxiety that BTC’s sluggish settlements can cause investors to start looking at what the competition offers.
The community lacks consensus on the best way BTC transaction levels can be expanded. The act of introducing changes to BTC’s underlying software is called ‘Forks.’ In contrast, soft forks result in the introduction of changes that don’t create new coins; the outcome of hard forks is introducing changes that create new coins.
Hard forks show a significant change in the regulations that all network users must abide by. Occasionally, disagreements may occur as some miners may be reluctant to shift to the new protocols. And these conflicts may result in Bitcoin volatility.
Because of their volatility, it’s challenging to predict the future of digital currencies with accuracy. However, because of the present trends, most analysts give an optimistic prediction about Bitcoin. Some indicate that digital currency’s price will continue growing because many individuals and institutions are looking for alternative investment vehicles. These analyses will result in a renewed interest in Bitcoin, which may ultimately lead to high demand for the digital currency. With the spike in demand, prices will go up.
Each digital currency available has a use. If a coin lacks a purpose, its value will below. The objective of BTC is to be a peer-to-peer platform that only uses virtual currency. Besides being a payment method, BTC can also work as an alternative investment option. BTC’s value is rising because many users are finding it to be a better investment option and a quick way of transacting online.
News and Media
News, whether positive or negative, can have an impact on BTC. For example, if news outlets cover the recent hack on BTC, the digital currency prices may come down. And if the news is about how quickly you can transact through BTC, the price may spike.
Various factors can cause price changes in BTC. Many factors can lead to significant price changes in the digital currency, from demand and supply to mass adoption. Some of them are highlighted and explained here.