Bitcoin is a cryptocurrency launched in 2009 based on the development of Satoshi Nakamoto (the pseudonym of the still unknown creator of BTC). Unlike traditional currencies, Bitcoin is not issued by a central bank or supported by the government. Therefore, it is quite difficult to indicate its value, and nevertheless, it has a market rate that can rise or fall.
To make informed investment decisions, it is important to understand. What affects the Bitcoin price? There are five key factors here.
1. Supply and demand
This is the key factor to which all others come down. If there are many sellers and few buyers, then the price falls, and vice versa. The same market forces apply to fiat currencies, any goods, stocks, etc.
The number of companies and retail investors interested in Bitcoin is growing every day, giving it real market value. However, the virtual currency suffers greatly due to volatility issues. Even at the peak of its popularity, it was difficult to find accurate answers to questions such as what determines the value of BTC and whether BTC has intrinsic value.
In fact, the price of Bitcoin is determined by market dynamics, supply and demand, and it should be noted that it cannot be influenced by one person or organization. Bitcoin is traded on many exchanges, by many people, and as a result, the price may vary slightly on different exchanges, although these differences are quickly smoothed out thanks to arbitrage traders.
The factors listed below directly or indirectly affect the supply and demand ratio of cryptocurrency.
2. Regulation
While cryptocurrencies technically operate outside the reach of government regulation, their prices and transaction volumes actually respond significantly to news of regulatory changes.
The impact depends on the specific regulatory category to which the news relates:
events related to bans on cryptocurrencies;
with their control under securities laws (those have the greatest negative impact);
anti-money laundering and anti-terrorist financing (AML) news;
on limiting the interaction of cryptocurrencies with regulated markets, etc.
News indicating the creation of legal frameworks tailored to cryptocurrencies often coincides with strong market growth. This indicates that crypto markets do rely on the activities of regulated financial institutions. It is also noticeable that these markets are segmented by jurisdiction.
3. Competition
Despite the fact that Bitcoin is the very first and most famous cryptocurrency, thousands of other coins and tokens are fighting for a place in the sun along with it. As of 2023, BTC still dominates the market, but the degree of its dominance is gradually weakening: if in 2017 Bitcoin accounted for 80% of the market capitalization of the entire market, now the figure has dropped to 37%.
The main reason for this was the increased awareness and capabilities of alternative coins (altcoins). For example, due to the boom of DeFi, decentralized finance, Ethereum has become a much more serious competitor to Bitcoin than it was before. Ethereum now accounts for about 19% of the total market capitalization of cryptocurrencies. Other coins that are stealing market capacity from BTC are USDT, USDC, BNB, XRP.
4. Production costs
Cost/production costs are always included in the price of any product. This also applies to Bitcoin.
Coins are obtained through mining. The cost includes the constant costs of equipment and electricity, without which mining is impossible. The amount of these costs depends on the complexity of the algorithm. The difficulty is adjusted automatically approximately every two weeks so that the block mining speed always tends to 10 minutes. If coins are mined faster than needed, the difficulty increases, and vice versa.
Accordingly, the more complex the algorithm, the more computing resources need to be spent on solving the hash and creating a block. This already sets a certain minimum price for BTC, which varies constantly.
5. Exchange where Bitcoin is traded
As we already mentioned, the price of Bitcoin can vary depending on the exchange on which it is traded. For example, as of 9:40 am (Moscow time) on January 12, 2023, BTC was trading at the following prices from $18,054 to $18,221
It depends on several things. Firstly, on the liquidity of the exchange. On larger platforms the volume of Bitcoin trading is huge, and on smaller ones it is correspondingly lower. The difference in quantity supplied affects the price. Secondly, the price is based solely on trading transactions and does not have any standard. Thus, on little-known exchanges with very low liquidity, the price may differ significantly up or down. The situation is leveled out thanks to arbitrage, when people make money on the price difference between sites, selling where it is more expensive and buying where it is cheaper, as a result the difference is smoothed out quite quickly.