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What Determines Bitcoin Price - A Professional Report
The price of a Bitcoin is determined by supply and demand. When demand for Bitcoins increases, the price increases, and when demand falls, the price falls.
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December 11, 2022
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Satoshi Nakamoto, the pseudonym assigned to Bitcoin's developer, released the Bitcoin protocol in 2009. (or creators). A blockchain keeps track of all of the purchases and sales of cryptocurrency, demonstrating ownership by displaying the whole history of each unit.
Bitcoin is not issued by a central bank or backed by a government like most other currencies. Because Bitcoin is not a company, buying it is not the same as buying a stock or bond. As a result, investors have to make their investment decisions without the benefit of conventional resources such as company financial statements, Form 10-Ks, fund performance comparisons, etc.
Learn what factors affect the value of Bitcoin so you can make educated judgments when deciding whether or not to include it in your investing portfolio.
KEY TAKEAWAYS
Purchasing stocks gives you a stake in a firm, whereas buying bitcoin gives you ownership of that number of bitcoins.
Given that bitcoin is decentralized and not issued or controlled by any one authority, it is immune to the monetary policies of any nation-state.
Factors such as supply, demand, availability, alternative cryptocurrencies, and investor attitude have the most impact on Bitcoin's price.
There will only ever be a fixed amount of bitcoin in circulation, and the last coin is only expected to be minted in 2140.
What Factors Influence Bitcoin's Price?
Since Bitcoin is neither issued nor backed by any government, it is not subject to the same monetary policy instruments, inflation rates, or measures of economic development that affect the value of government-issued currencies. Bitcoin is more of a commodity than a currency, and its value is affected by the same variables that affect the value of any commodity:
Market demand and the amount of bitcoin available
Bitcoin mining expenses
The variety of available digital currencies is growing.
laws restricting its distribution and use
mass communication and current events
Effects of Supply on Bitcoin's Price
A significant factor in establishing an asset's price is the quantity available for purchase. High prices reflect the scarcity of a good, whereas low prices reflect its abundance. There is widespread knowledge that only 21 million bitcoins will ever be generated and that a fixed number will be issued each year. Bitcoins can only be generated at a certain pace that will gradually decrease due to the protocol's architecture.
Every four years or so, the pace at which new bitcoins are generated slows down. In what is known as a "halving," the reward for mining a block will be halved for the last time in May 2020.
Thus, Bitcoin's future supply is diminishing, which increases demand. If maize harvests were officially announced to be cut every four years until none were harvested, the price of corn would increase for the same reason.
Bitcoin's Price and Demand
More and more media outlets, so-called "investment gurus," and company owners are extolling the virtues of bitcoin, driving up demand. Countries with significant inflation and depreciated currencies, such as Venezuela, have also seen a rise in Bitcoin's popularity. Additionally, it is often used by people who move huge quantities of money for criminal purposes.
This suggests that rising demand and limited supply have contributed to pushing the price of bitcoin upward. Its value, however, continues to experience boom and bust cycles. Examples include Bitcoin's price, which had a surge in 2017, a lengthy slump in 2018, and two dramatic spikes and dips in 2019, 2020, and 2021.
Production Costs and Bitcoin Price
Bitcoin's price is set in large part by its manufacturing costs, much like the prices of other commodities. Some studies have shown that the price of bitcoin in the crypto markets is proportional to its marginal cost of production.
Bitcoin's production cost may be generally calculated as the total of the direct fixed costs associated with the hardware and energy used in Bitcoin mining, as well as an indirect cost associated with the complexity of the Bitcoin mining algorithm. In Bitcoin mining, a group of computers (called "miners") compete to be the first to crack a cryptographic hash value, with the winner receiving a block reward plus transaction fees accrued since the previous block was discovered.
The difficulty of the bitcoin algorithm is an unintended consequence of mining for bitcoins. Bitcoin's price is influenced by supply and demand, which in turn is affected by the algorithm's different degrees of difficulty.
A large amount of computing power is needed to solve the hash and unlock the block, which is necessary to get the reward. The cost of mining equipment is high and will require a significant investment from the miner. Bitcoin mining uses a lot of power, which may add up to significant costs. Bitcoin mining is estimated to use as much energy as many small nations.
How Competition Affects Bitcoin's Price
Hundreds of different tokens are competing with Bitcoin for investors' money, despite Bitcoin's popularity. In the year 2022, Bitcoin was the undisputed king of the cryptocurrency markets. It once reigned supreme, but its might has since diminished. More than 80% of the value of the cryptocurrency market in 2017 was held by Bitcoin. This percentage had dropped below 50% by the year 2022.
The major cause of this was the rise in popularity and sophistication of other currency options. For instance, the growth of decentralized finance has allowed Ethereum to emerge as a viable rival to Bitcoin (DeFi). Ether (ETH), the cryptocurrency utilized as "gas" for transactions on its network, has attracted the attention of investors because of its ability to reimagine the tracks of the current financial infrastructure. Ethereum is responsible for almost 20% of the total market capitalization of cryptocurrencies.
Similarly, the popularity of other cryptocurrencies that are being released at a steady pace is rising rapidly. There are several alternatives to Bitcoin that are eating into the market share that BTC formerly had. Investors have been drawn to Bitcoin despite the fact that these competing cryptocurrencies have sucked up some of the ecosystem's investment funds. This has led to greater interest in and understanding of cryptocurrency. As a symbol of the cryptocurrency industry, Bitcoin has reaped the benefits of this spotlight and seen its value rise.
Regulations and Bitcoin's Price
As a result of a financial crisis caused by lax regulation in the derivatives market, Bitcoin was made available to the public. Bitcoin is still unregulated, earning it the reputation of a borderless, unregulated economy.
Bitcoin's unregulated position has advantages and disadvantages. Due to the lack of oversight, it is unrestricted for usage beyond national boundaries and is not subject to the same rules as other currencies. But governments and other stakeholders are pushing for crypto regulation.
When investors get carried away with a particular asset, it drives up its price. When people get anxious about potential losses, they may sell out, causing the price to fall.
Regulators will eventually be put in place, but how they will affect Bitcoin's value remains to be seen. Bitcoin's price, for instance, may be affected by decisions made by the Securities and Exchange Commission (SEC) in the United States regarding cryptocurrencies. Following the SEC's approval of the ProShares Bitcoin Strategy ETF, the first bitcoin-linked exchange-traded fund (ETF) in the United States, the price of bitcoin soared to $69,021 in October 2021. (BITO). Nonetheless, Bitcoin's price was still hanging around $40,000 only a few months after hitting that peak.
The supply and demand of bitcoin changed when China banned trading and transactions in September 2021. Because of the government's crackdown, Chinese mining farms have packed up and relocated to nations more hospitable to the cryptocurrency industry. After dropping from over $51,000 at the start of September to roughly $41,000 by the end of the month, prices soon recovered and reached their pre-September lows as business activity kicked back up.
The sentiment of investors toward Bitcoin may be influenced by what celebrities and other public figures say about it on social media.
Bitcoin's Price and the Media
Bitcoin's price is affected positively and negatively by media and news coverage, which aim to enlighten investors and other interested parties. Whenever there is a shift in any of the aforementioned variables, it is widely reported and disseminated. Thus, Bitcoin's price tends to rise in response to positive news for cryptocurrency investors and fall in response to negative news.
One of the most important variables influencing cryptocurrency pricing is investor sentiment, which is affected by a number of factors, including supply and demand, manufacturing costs, competition, regulatory changes, and the media coverage that follows.
Conclusion
The economic concept of "supply and demand" refers to the equilibrium between the offered and demanded quantities of a good or service at a certain price point. Fundamental to the study of economics, this model provides the basis for most discussions of how prices are set. However, there are many who believe the Bitcoin price is vulnerable to manipulation. Although the identity of the market manipulator is unknown, a forensic examination conducted by researchers at the University of Texas and the Ohio State University revealed that virtually all of bitcoin's gains in 2017 can be traced back to "one significant actor." The number of major companies in the Bitcoin market will dwindle as the currency becomes more widely used and more individuals acquire bitcoins, even if only in small amounts.
FAQ
Are bitcoins a good investment?
Bitcoin's brief history as an investment asset has been marked by extreme volatility. Before putting your money into Bitcoin, you should discuss your individual financial circumstances with an investment advisor.
What Is Bitcoin's Current Stock Price?
While you can't buy shares in Bitcoin itself as a stock, you may buy shares in businesses that have made investments in blockchain technology or cryptocurrencies.
What about bitcoins—are they against the law?
In spite of bitcoins' widespread use as a medium of exchange, only a small number of nations have formally accepted them as legal cash. All-out prohibitions are in place in China, Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia.
Should I invest $100 in bitcoin?
Due to the uncertainty of the bitcoin market, the value of your current holdings of bitcoin might decrease by as much as 30% in the next 30 minutes. It's possible that the value of your bitcoin will increase, however. In order to make a wise investment decision, you should discuss your own financial situation with a qualified finance and investing expert before making a purchase.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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