Whether you are new or an expert in the cryptocurrency industry, one of the important matters that are a must-know is where and how Bitcoin's price is derived. What determines the price of cryptocurrency?
Perhaps you are already fully aware that volatility is not uncommon in the cryptocurrency world. You might be overwhelmed with the sudden surges in its value, then all of a sudden, the price drops without warning. This is why it is necessary to have the ability to predict its movement, especially when you are an investor or a trader. In order to have the slightest idea about what might possibly occur in the future of the said digital currency, you must have knowledge about the factors that determine the value of cryptocurrency, especially Bitcoin, which sets standards to all alternative coins in the market out there.
Bitcoin’s decentralised nature is one of the reasons for its price instability simply because it is not governed or backed by the government or any underlying assets. However, despite the decentralisation feature of a cryptocurrency, it still shares common characteristics with fiat currency – its price is determined by supply and demand. As the demand increases, the price also increases. When the demand decreases, the price falls as well. On the other hand, Bitcoin is immune to fluctuations in demand. This unique digital asset is absolutely inelastic in terms of its new supply schedule.
Supply and Demand
It is already given that Bitcoin has a limited supply of around 21 million. Approximately 18 million has already been mined. With only a few coins left, it is noticeable that its value becomes even higher. For most commodities such as gold or fiat currency, whenever they experience increases in demand, the common reaction is the production of more supply and the return of prices to an equilibrium.
The cost of production plays a very important role in order to determining Bitcoin’s price. According to research, the marginal cost of production is closely related to the prices in the crypto market. The cost of production in Bitcoin has something to do with the cost of electricity used in mining as well as the infrastructure together with the indirect cost of the level of difficulty of Bitcoin’s algorithm. The difficulty level of the algorithm may vary. It can either hasten or slow down the production of Bitcoin, which may relatively affect its price.
Bitcoin is known to be the number one cryptocurrency in the market. Given this fact, there are still thousands of crypto rivals that are willing to compete with Bitcoin. The dominance of Bitcoin in terms of trading has already waned over time. Having accounted for owning almost 80% of overall market capitalisation in 2017, it went down to almost 50% in 2021.
The primary reason for this drop in market cap is the increased awareness of the other existing alternative coins and their capabilities. For instance, Ethereum as the main competitor of Bitcoin is known as the proponent of Decentralised Finance(DeFi), which most investors can benefit from. And as of this year, Ether currently dominates 18% of overall market capitalisation.
As a result, the increased awareness about cryptocurrencies somewhat benefited Bitcoin, and its price has surged even more.
It is essential that before investing in cryptocurrency, one must fully understand the risks, which include volatility. In addition, purchasing crypto in trusted sites such as Immediate Edge can help equip investors and traders with strategies that will enable you to conquer sudden price movements in the market.
Development is Regulation
Bitcoin was released in order to provide resolution for the financial crisis in which regulations in the derivative market are loosened. Most cryptocurrencies are unregulated, meaning they are not governed by the government or financial institutions. The lack of regulations has advantages and disadvantages. This only means that users can take advantage of utilising the currency across borders. It enables them to make transactions that are free of government control. On the other hand, this also gives way to criminal consequences. The absence of regulations can invite criminal activities outside financial jurisdictions.
Some countries are beginning to adopt Bitcoin as part of the financial revolution. As they began incorporating cryptocurrencies in their economies and markets, regulatory developments related to trading and investments were also developed. It can be advantageous to investors as regulations could mean increased liquidity of the crypto asset, therefore affecting its supply and demand.
Other influences include news developments to personalities sharing their views about cryptocurrencies, particularly Bitcoin. For instance, the CEO of Tesla Elon Musk’s tweets and statements about Bitcoin or other cryptocurrencies have a remarkably huge impact on the movement of crypto’s price. In addition, news about Bitcoin may also affect its market value over time.
Bitcoin’s price can be accessed publicly anytime as desired, along with the latest crypto news and market prices through the largest trusted info websites such as CoinMarketCap. Through regular tracking of prices from time to time, it may be possible to gain an understanding of its movement.