Wednesday, April 24, 2019

What Determines Bitcoin’s Price?

Bitcoin is currently trading at $3,969 and within a matter of seconds, this price will either increment or decrement. But what determines Bitcoin’s price? is there someone out there manipulating its value and having a good laugh at us all? Not at all! Bitcoin’s price is driven by a number of factors which gives it its value at any particular time.

And again, what determines Bitcoin’s price? That’s a question that has gotten many answers from cryptocurrency enthusiasts and professional traders. What each response has in common, is that Bitcoin’s price is not determined by an individual. So, what has BTCNN got to say? let’s take a closer look.

High Demand and Low Supply

We’re taught in Economics that the higher the demand, the higher the price, and the higher the supply? Alright, you get the drift. Now, how does that come to play with Bitcoin? Bitcoin currently has a supply of about $17 million out of a total of $21 million which it can have. For it to exhaust 21 million, more Bitcoins need to be created (read more on Bitcoin mining here)

However, there is a fixed mining rate where fewer coins can be generated on a yearly basis. Take, for instance, 9.8% in 2015, 6.9% in 2016, and 4.3% in 2017. What this means is that while Bitcoin is still supplied to the market, it is on a decreasing basis. As such, supplying fewer coins to a growing market has a way of incrementing its price.

An instance of an overly large supply which was able to drag Bitcoin’s price down from $17.50 to $0.01 is in 2011. Here, a hacker was able to gain access to the MTGox cryptocurrency exchange and made several large sell orders. With more Bitcoin lying around and fewer hands to buy, that was enough to plummet its price.

News Evolving From Certain Countries

News emerging from Asian countries have been reported to have the highest impact on Bitcoin’s price. The Chinese government, for instance, stated in 2014 that they are uncertain on how to regulate the cryptocurrency space and if banks will be banned from rendering services to crypto operators. This had an effect of declining Bitcoin’s from about $588 on March 26, 2014, to $477 on March 28, 2014.

Another instance is the case of Silkroad, an online drugs marketplace where Bitcoin was exchanged for illegal items. Its founder, Ross Ulbricht was arrested in 2013 and the platform was seized by the authorities. Prior to the news of his arrest, Bitcoin was valued at about $145 but declined to $109 on the same day. The price drop was also motivated by fear where people thought the asset may as well die off.

Variation on Cryptocurrency Exchanges

Bitcoin’s price tends to differ on a number of exchanges despite the fact that the same virtual asset is being offered. The location of the exchange could bring about the difference in price as was the case in Golix, a Zimbabwean-based exchange where Bitcoin was worth over 30 percent in comparison with other exchanges.

Likewise, the difference in transaction fees of a crypto exchange could also impact on the price. We’ve seen Bitcoin trade significantly higher on Bitfinex while others were still around the $3,900 range.

There’s also the network effect on these exchanges which could impact on the price. By effect, we mean an increase in the number of participants in the market which makes the space more valuable. Recently, there are expectaitons that an influx of institutional investors in the market will even have a greater effect on Bitcoin’s price.

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