Bitcoin’s decentralized nature drives it apart from the traditional factors that affect other financial instruments in the macroeconomic scenario. Monetary policy, inflation rates, etc., do not affect the previous or current BTC price. Bitcoins can rather be compared with commodities, and it is used as a commodity to store value.
Bitcoin’s price factors are multiple, mainly:
- Supply
- Demand
- Production cost
- Competition
- Regulation
- Media coverage
Let’s explore these factors to see how they affect Bitcoin’s price:
Supply – The Cornerstone of Bitcoin’s price
The Bitcoin supply is limited. It’s a deflationary currency —the total supply is fixed at 21 million BTC, which will be mined at a specific amount yearly through an algorithm.
Since miners produce blocks to the Bitcoin blockchain, they receive a reward in BTC. This algorithm cuts those rewards every 210,000 blocks, which are “halving events,” which occur every four years.
A scarce asset is likely to have a higher price. And since Bitcoin’s supply is reduced as we move forward, it helps to potentially increase BTC’s price over time.
How Demand Affects Bitcoin’s Price
Supply and demand go hand in hand. As with any asset, if there’s demand and limited supply, the price is high.
Centralized and regulated systems have high entry barriers and require an intermediary that adds to the expenses of a particular transaction. Bitcoin’s accessibility and transparency have made it an appealing investment asset, not only to retail traders and financial institutions but also to the average citizen and the bankless.
How Production Affects Bitcoin’s Price
One of the most critical factors determining Bitcoin’s price is the production cost, which is divided into two factors:
- Cost of equipment and energy consumption: to produce Bitcoins, miners need 1) mining software, which most are free to download, and 2) mining hardware, which can be expensive depending on the mining rig, but the more expensive, the more profitable.
- The algorithm’s difficulty level: Miners must solve a mathematical puzzle to find an encrypted number. The miner who solves the puzzle wins the newly minted Bitcoins and transaction fees as a reward. Solving the puzzle is challenging since it requires tremendous processing power and energy consumption.
Competitors – Can Alternative Cryptos Affect Bitcoin’s Price?
Bitcoin dominates the mindshare of the crypto industry, but its dominance has been waning over time —38% dominance, as per data from CoinGecko.
This is mainly attributed to the advent of Decentralized Finance, which has reimagined the way people do finance with a more inclusive and lucrative financial ecosystem. We now have thousands of alternatives to Bitcoin, either to compensate for certain limitations with Bitcoin (such as transaction throughput) or to bring something new to the industry. Ethereum, Bitcoin’s main alternative, is the pioneer of the DeFi movement.
Ethereum is a blockchain protocol that allows developers to create decentralized applications (DApps) of all sorts and shapes on its network: GameFi, NFTs, Art, Metaverse, yield-generating protocols, and more. This paved the road for new financial incentives and effectively elevated the blockchain infrastructure to a new level regarding use cases.
Likewise, we have dozens of blockchains that have carved a niche out for themselves, like Solana, Fantom, or Avalanche. New coins and tokens are created daily, yet they don’t offer anything new to the space. Hence, the ones that can potentially take ground from Bitcoin are the top ten currencies by market cap, which can be found on data aggregators such as CoinGecko or Coinmarketcap.
Regulation Plays For and Against Bitcoin’s Price
Bitcoin was born a year after the 2008 crisis, which caused a global recession and exposed banks’ and significant financial institutions’ lack of regulation and transparency. Bitcoin has remained unregulated and will remain that way. However, government regulation plays a crucial role in Bitcoin’s price.
For example, Bitcoin —and the overall crypto market— can benefit from countries allowing crypto companies to operate legally and promoting cryptocurrencies as another investment asset. Or maybe approve a Bitcoin-based exchange-traded fund. Countries like Australia and Canada have already approved BTC and ETH ETFs, allowing keen investors to gain exposure to crypto assets.
However, negative regulation can be, for example, a country like China cracking down on cryptocurrencies and prohibiting citizens from using them. Good or bad, regulation will affect Bitcoin’s price.
Effect of Media Coverage on Bitcoin’s Price
The cryptocurrency market has one of the most significant capitalizations in the world, which is why we must have proper and instant media coverage of the latest movements from the crypto and DeFi worlds. When good news spreads through social media, chances are more investors are more likely to buy BTC, pushing its price up. But, naturally, its price will likely drop if the information is terrible.
The media covers everything related to Bitcoin and other cryptocurrencies and the elements that affect the decentralized market in an unbiased manner. This is important since it will broadly impact investors’ outlook, which is a fundamental pillar affecting cryptocurrency prices. Are prices up, down, or sideways? Is the Bitcoin difficulty rate increasing, or is Cardano finally introducing smart contracts? Whatever it is, investors want and need to know.
Final Thoughts
As you see, Bitcoin’s price factors are multiple and have their level of complexity. Bitcoin remains a volatile asset, and regulation still doesn’t favor the cryptocurrency industry. Until then, the factors we mentioned will keep affecting Bitcoin’s price.
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