Since its launch in 2009, determining the price of bitcoin has been a nearly impossible task for crypto enthusiasts and experienced traders alike. Given the dynamic nature of crypto markets, taking a “wild guess” may be as accurate as going over dozens of bitcoin historical charts. Nevertheless, because of bitcoin’s distinctive protocol, we can argue that its future price will be higher than it is today. Would you like to know why? Let’s take a look at the main factors that determine the price of bitcoin.
Before we can jump into the factors that determine the price of bitcoin, let’s dive into how the bitcoin network works.
The bitcoin network consists of nodes that are responsible for verifying transactions on bitcoin’s blockchain. These transactions are verified every ten minutes by resolving a complex cryptographic puzzle. This can only be achieved by “miners” (computers) which are competing with each other to resolve the puzzle first and claim the reward. Currently, the reward for “mining” a block is at 6,75 BTC. We will explain later why this reward is important.
In today’s dynamic markets, bitcoin price volatility can be due to many factors. Such as political uncertainty, financial market turmoil, monetary policies, an exchange being hacked, to mention just a few. All of these factors have something in common, and they apply to any good and service, its impact on the supply and demand economics of the underlying asset. Let’s explore what we mean regarding the supply and demand of bitcoin.
As of the writing of this article, the supply of bitcoin (already mined and in circulation) is around 18,5 million. But, as you know, the supply goes up every ten minutes with 6,75 BTC. The demand for bitcoin comes from the buyers and the people making use of its capabilities, giving bitcoin its market price.
As we already explained in bitcoin’s protocol, we know that the new mined supply that enters the system is established and predetermined, and this new supply only changes every time there is a so-called bitcoin halving. This event occurs every 4 years. It is also important to keep in mind that the total supply of bitcoin to ever exist is 21 million.
The technical part of the supply is embedded in the protocol, but there is one more important factor affecting supply which is not embedded in the technology itself but driven by humans and market behaviors. If users lose the trust in bitcoin, they may go to exchanges and sell their bitcoin adding to the available supply. If that growing supply isn’t matched by an equally growing demand, then the bitcoin price will go down until it finds its balance again.
The demand for bitcoin comes from its users, investors, speculators which are all market participants with different goals. For example, there are countries with failed economies and monetary policies that have turned to bitcoin to be able to transact, purchase and even use it to protect savings because even though bitcoin’s volatility is high, they know for sure that their devaluing currency is not a better option.
The demand for bitcoin can be affected positively and negatively depending on what is occurring around the world. As an example, we can take a look at the challenges that COVID-19 brought to the world and the financial markets which saw bitcoin crash around 50% in March due to a liquidity crisis exacerbated with falling market valuations. Whoever took the opportunity to buy bitcoin at the March lows, is more than 100% ROI right now.
Although most cryptocurrencies follow the same paradigm of blockchain and its protocol, the main difference that bitcoin has over the others is that it doesn’t belong to anyone. Additionally, bitcoin is not tied to a jurisdiction, company, or CEO. It just exists on the internet and will always exist as long as there is someone willing to mine it. Another factor that differentiates bitcoin from the others is that because it has the highest mining power (hash rate), it is the most secure and hard to attack blockchain.
During its short life span of just over a decade, bitcoin’s proposition has shifted. In its early days, it was thought to be the digital equivalent of cash and as time passed it was compared to “digital gold” because of its scarcity, immutability, and the way it is created (“mining”).
Many argue that bitcoin has no intrinsic value, but it costs money to mine bitcoin and those miners are not willing to sell below their operation costs. Arguably, that is bitcoin minimum value and from there up or down is just market volatility and participants’ behavior.
We arrived at the last part of this article, and we are happy that you stayed with us. It is really difficult to answer that question without knowing more about you and your risk appetite. Bitcoin is a volatile asset and will stay so for the near future, but without a doubt, it was the best performing asset of the last decade and its market capitalization is still 35 times smaller than gold’s market capitalization, and much smaller than the overall financial markets as a whole. It has so much more room to grow in the next decade, as we see it becoming accepted as an established asset.
If we take a look at what the central banks and governments are doing around the globe, it is just money printing out of thin air, which will reflect in the future as inflation and devaluation of fiat currencies. Bitcoin is a vehicle to hedge against that because it cannot be printed out of desire and its supply is capped.
At Bitcaribe, we can provide the necessary information and experience to navigate this market, and together we can evaluate what will provide the best outcome to your specific needs. If you still have any questions or you would like to receive some advice before making your purchase for the first time, please don’t hesitate to contact us through the following channels:
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