How Bitcoin Price is Determined?
Various economic and technical factors is responsible for How bitcoin price is determined. Let's explore all the possible factors.
Bitcoin, the world’s most popular cryptocurrency has more value than most of the securities and stocks. But do you know How Bitcoin price is determined? Who controls the price of Bitcoin?
The answer to this question is a bit challenging as Bitcoin depends upon various technical as well as fundamental aspects by which its price fluctuates. Recently, SEC’s chairperson Gary Gensler regarded Bitcoin as a Commodity under CFTC’s laws. So another question is “Is Bitcoin Backed by Gold or something precious?”
Unlike traditional currencies, Bitcoin is not issued by a central bank or backed by a government. For investors, buying a bitcoin is different from purchasing a stock or bond because Bitcoin is not a corporation.
This article will delve into How Bitcoin price is determined and what factors affect its pricing. Let’s get started.
How Bitcoin Price is Determined: Factors and Fundamentals
Bitcoin's price volatility has many sceptics doubting the mathematics and economic foundations of price swings while looking for a generalised explanation of its worth.
Bitcoin does not follow official monetary policy due to its decentralised structure, and it is not backed by any underlying asset or government. This raises scepticism among investors and consumers who value the price stability signals provided by government policy and assistance.
The following elements affect Bitcoin's price since it functions more like a commodity being used to hold value:
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Bitcoin Supply & Demand
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Bitcoin’s Scarcity
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The cost of minting a bitcoin via the mining process.
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The number of cryptocurrencies in competition
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Regulations controlling its distribution and usage
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News and media
We will discuss each of them in order to get the answer to How Bitcoin price is determined.
Bitcoin’s Supply & Demand
Majorly, Bitcoin's price, like any other asset, is controlled by supply and demand. Bitcoin's supply is restricted since there can never be more than 21 million Bitcoin in existence, and the pace at which new Bitcoin is generated is lowering over time due to a process known as Bitcoin halving. Bitcoin demand, on the other hand, might fluctuate due to a range of reasons such as market mood, global economic conditions, regulatory changes, and so on.
On the supply side, Bitcoin is a one-of-a-kind asset in that its fresh supply schedule is totally inelastic; it is unaffected by changes in demand. When demand for most goods, including fiat currency and gold, rises, producers respond by increasing output and returning prices to equilibrium. Because of the difficulty adjustment, as demand for bitcoin rises, the creation of new bitcoin does not rise.
That’s one of the factors in how Bitcoin price is determined. But, there are several other factors also.
How Does Bitcoin Scarcity Affect Price?
Bitcoin's scarcity is one of the second most factors in how Bitcoin price is determined. The total number of bitcoins that will ever exist is limited to 21 million, and this cap on supply creates scarcity, which in turn, drives up the price.
Bitcoin's scarcity works on the principle of supply and demand. As demand for Bitcoin increases, and the available supply remains limited, the price of Bitcoin goes up. This is because people are willing to pay more for a scarce asset, and this scarcity gives Bitcoin its intrinsic value.
Source: Glassnode
The scarcity of Bitcoin is also baked into its protocol, which has a predetermined inflation rate that decreases over time. As more bitcoins are mined, the reward for mining them decreases, and the supply of new bitcoins entering the market slows down. This creates a situation where the existing supply of bitcoins becomes scarcer, which further drives up its price.
Furthermore, Bitcoin's future monetary policy is completely predictable, giving investors high confidence that inflation will be introduced or increased at a later date.
Cost of Minting a Bitcoin
The production cost of Bitcoin is roughly equal to the total direct fixed expenses for infrastructure and power necessary to mine the cryptocurrency, as well as an indirect cost due to the difficulty level of its algorithm. Bitcoin mining is a network of miners trying to solve for an encrypted number; the first miner to do so receives a reward of newly minted bitcoins as well as any transaction fees earned since the last block was found.
Production costs, like other commodities, play an important influence in determining Bitcoin's price. According to certain studies, the price of bitcoin in cryptocurrency marketplaces is directly tied to its marginal cost of manufacturing.
Solving the hash in order to unlock a block and get a reward necessitates brute force in the form of significant computing power. In terms of money, the miner will need to purchase several expensive mining machines. Bitcoin mining also necessitates high power costs. According to estimates, the Bitcoin mining network consumes more power than certain small nations.
Competition Affecting Bitcoin Prices
How Bitcoin Price is Determined through competition? Sounds a bit confusing right? Competition is one of the main factors influencing Bitcoin's price changes, and it is an interesting subject to investigate.
Competition is an intrinsic component of every market, including Bitcoin. As more individuals get interested in Bitcoin, competition for a limited amount of coins grows. This rivalry can take several forms, including competition between customers and sellers or competition among different cryptocurrencies.
Bitcoin accounted for more than 80% of total market capitalisation in cryptocurrency marketplaces in 2017. By 2022, that proportion had dropped to less than 50%.
The primary cause for this was improved awareness of and ability to use alternate currency. Because of the surge in decentralised finance (DeFi), Ethereum, for example, has emerged as a serious rival to Bitcoin.
Regulatory Concerns on Bitcoin
Bitcoin was introduced in Between the 2008 Financial crisis when the world economy collapsed due to Hyperinflation. Due to this, several governing bodies questioned the centralised monetary system. Satoshi Nakamoto had different plans and introduced Bitcoin; Deflationary and decentralised.
The cryptocurrency itself is still unregulated, and it has earned a reputation for its borderless and uncontrolled ecology.
Bitcoin's lack of regulatory status has both advantages and disadvantages. Because there is no regulation, it can be freely transferred across borders and is not subject to the same government-imposed controls as other currencies. Governments and other interested parties, on the other hand, are continuing to advocate for cryptocurrency regulation.
In the United States, for example, cryptocurrency judgments issued by the Securities and Exchange Commission (SEC) might influence Bitcoin's price. The price of Bitcoin reached $69,000 in October 2021, only weeks after the SEC authorised the first bitcoin-linked ETF in the United States, the ProShares Bitcoin Strategy ETF (BITO).
Similarly, China's crackdown on crypto trade, including Bitcoin, had a significant impact on the crypto market.
How News & Media Affect Bitcoin Price?
Because Bitcoin is a decentralised digital currency, it is extremely vulnerable to the impact of news and media coverage. As a result, every mention of Bitcoin in the press or media might significantly affect its price. In this post, we will look at how the news and media impact the price of Bitcoin.
Bitcoin coverage in the media may be either good or bad. Positive media may promote awareness and interest in Bitcoin, which can lead to a rise in demand and price. Negative coverage, on the other hand, can cause fear and uncertainty, resulting in decreased demand and a price decline.
The Impact of News and Media on Bitcoin Price could be due to:
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News that has a potential impact on Bitcoin's adoption, legality, or regulation can move the price in either direction.
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Regulatory news can also have a significant impact on Bitcoin's price, with strict regulations leading to a price drop, and favorable regulations pushing up the price.
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The media's coverage of Bitcoin can shape the public's perception of the cryptocurrency and impact its adoption and use.
Investors need to stay informed and monitor news and media coverage to make informed investment decisions in the volatile and unpredictable cryptocurrency market.
Conclusion
Bitcoin's price is controlled by a number of technical and fundamental variables. Bitcoin's price is affected by supply and demand, scarcity, the cost of mining a bitcoin, competition among various cryptocurrencies, legislation controlling its distribution and usage, and news and media.
Furthermore, there are micro factors that influence Bitcoin prices from time to time.
From global reserve currency to absolutely worthless, Bitcoin price prediction range from zero to more than $1 million. In the end, the opinions of Bitcoin supporters and opponents will not influence the price. BTC's market price, like currency exchange rates and the prices of other assets, is controlled by supply and demand rules.
Hope this How Bitcoin price is Determined guide helped you to get better insights of how the number one crypto moves.
FAQs
How is Bitcoin market value calculated?
Market capitalization (or market cap) is the total worth of all coins created for a cryptocurrency such as Bitcoin. It is computed by multiplying the current market price of a single coin by the number of coins in circulation.
What factors affect the price of Bitcoin?
The price of Bitcoin can be affected by a number of factors including market demand, regulatory changes, news events, adoption rates, and changes in the overall sentiment toward cryptocurrencies.
Is there a limit to the price of Bitcoin?
Technically, there is no limit to how high the price of Bitcoin can go. However, as the price of Bitcoin increases, it becomes less accessible and affordable for many people, which can lead to decreased demand and a drop in the price.
Can the price of Bitcoin be manipulated?
Yes, the price of Bitcoin can be manipulated by individuals or groups who hold a significant amount of Bitcoin and engage in trading strategies that influence the market. However, market manipulation is illegal and can result in severe penalties.
How often does the price of Bitcoin change?
The price of Bitcoin changes constantly, as it is traded 24/7 on cryptocurrency exchanges around the world. The price can change by a few dollars or several hundred dollars in just a matter of minutes.
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