Key Factors that Influence the Price of Bitcoin
First Published date: 5. August, 2022Last Updated: 10. February, 2023Fact-checked by Adrian Müller
Bitcoin’s price has been one of the most volatile matters humans have ever known. Not long ago, experts predicted that Bitcoin’s price would exceed five figures in the coming years. Those same gurus now say the price might fall to a few hundred dollars. The explanation for this lies in Bitcoin’s price influencing factors.
In November 2021, Bitcoin sold at over 67 thousand dollars per coin. This is the highest the price has ever been. People who made a profit from these trades may have bought each coin at roughly ten thousand dollars one year ago.
But think about someone who bought Bitcoin at its peak rate in 2021. A year later, the prices fell to ten thousand dollars a coin. In this case, a buyer might feel devastated. However, the smart investor who understands what affects Bitcoin prices might have already seen this coming.
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What Factors Influence Bitcoin Price?
Like most other stuff, the major influencer of Bitcoin’s price is its supply and demand. Media hype, the unfolding of international events, and popular services’ announcement of Bitcoin’s acceptance as a currency also play a significant role. The emergence of new and competent crypto coins is also a key factor.
The Supply of Bitcoins
When there’s less of something, and people still want it the same as before, its price increases. Bitcoin designers have put this economic principle to work for them. Bitcoin strictly controls and limits its supply to ensure the coin’s fiat value never falls to zero. Capping the total circulation and ‘halving’ are the two ways they accomplish this.
One of the major rules for Bitcoin is that there can never be more than 21 million Bitcoin. The currency is inherently designed this way. When Bitcoin reaches the 21 million mark, miners will stop mining it. Because, unlike now, they would no longer receive crypto payments for mining the coin.
There are approximately two million bitcoins left to mine. At the same time, people’s interest in investing in crypto is stable, if not increasing. In other words, the supply of Bitcoin is slowly declining. Considering people are still interested in Bitcoin the same way in the coming years, the price will increase due to this low supply.
Besides capping its number, Bitcoin halves its production every few years. The mining of Bitcoin via relevant software and hardware happens at a specified rate. Since its introduction in 2009, this rate has split in half every four years.
If you want to mine a Bitcoin four years from now, you must put in twice the time and hard work than you would do today. This reduction in supply will help Bitcoin retain its value and see an increase. However, all these strategies would not be able to save the coin if there’s a dramatic decline in demand.
The Future Demand For Bitcoins
Considering the strategy Bitcoin has adopted to limit its supply, Bitcoin prices will increase in the coming years even if its demand remains constant. Whether or not Bitcoin’s demand will increase or decline is a matter of speculation, and both sides have valid arguments.
Increased Demand
Let’s consider why Bitcoins’ demand might stay the same or increase. Firstly, the general public’s participation in cryptocurrency is a recent phenomenon. They have only just started to understand and appreciate the investment potential of crypto coins. Being the oldest and first of its kind, Bitcoin is the most well-known and widely trusted. So, this coin will always have a special position among future investors.
Secondly, Bitcoin is a decentralized currency. A central bank does not actively control it. This makes it especially appealing to anti-government activists. Considering the progression of current world events, several countries might face war and political crises soon. During those times, Bitcoin and other crypto coins have great chances of becoming the people’s currency.
Decreased Demand
However, the decentralized nature of Bitcoin might also be the cause of its diminished demand. Since there isn’t any central authority, no one can intervene and take control if Bitcoin faces an inflation crisis like fiat currency. Many investors are starting to understand this and are reconsidering their crypto investments.
Also, unlike traditional investments, Bitcoin holds no intrinsic value. For instance, if you invest in gold, you own some gold. When you buy a company’s stock, you own a portion of that company. But buying Bitcoin doesn’t mean you own a portion of the Blockchain. The value only exists among the community that participates in the Blockchain.
Therefore, you cannot accurately predict that Bitcoin’s demand will undoubtedly increase or decrease. But if demands increase, the coin’s prices will rise and vice versa.
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Bitcoin Mining Price
When something costs more to produce, its price increases; the same applies to Bitcoin. The coin’s miners use specialized software and hardware to solve complex algorithms and validate a new block. Reaching this solution demands an incredible amount of processing power.
If the software and hardware costs increase, miners will have to invest more money to validate new blocks. In turn, the price of the coin shall rise. You also need a lot of electricity to handle such an increasingly complex process. So, if electricity costs rise, Bitcoin prices will likely increase.
The Emergence of New Coins
Bitcoin was the first crypto coin. It familiarized people with cryptocurrency and paved the path for new coins. When these new coins came, they had to offer some perks that Bitcoin didn’t. Otherwise, they wouldn’t have survived the competition. As the new coins developed their offerings more, they started to stand out, and Bitcoin looked a bit old in comparison.
For instance, Ethereum has proved itself a worthy competitor to Bitcoin. What attracted people to Ethereum was its NFT offerings. You could only access the world of NFT with Ethereum. Another new emergence was stablecoins (for example – Tether). These coins retain their value with an underlying asset like fiat currency or gold. They also seem much safer than Bitcoins.
Solana, BNB, Dogecoin, Siacoin, etc., are also worth mentioning. Some of these coins provide access to blockchain-based storage. Meanwhile, others let you play and make purchases in certain games. In other words, these alternative coins allow you to explore different multiverse dimensions.
When you compare Bitcoin to these, it seems like it doesn’t do much other than just being a crypto coin. As a result, the new coins were able to attract a significant number of investors. Moreover, investors are always looking to diversify their portfolios, and these alternative coins provide that opportunity.
Bitcoin’s dominance has declined due to the emergence of these competitors. Until 2017, Bitcoin ruled eighty percent of the crypto markets. But as the new coins started to emerge during this period, Bitcoin began to lose this position. As a result, Bitcoin’s market dominance was reduced below 50 percent in 2022. Future upgrades of new coins will reduce this further and bring down the prices more.
News, Social Media, and International Events
Like traditional trading, news and media significantly influence Bitcoin prices. If the mainstream media start to report negatively about Bitcoin investment, the prices will fall. Similarly, if there is positive and encouraging news about the asset, then prices will rise. It doesn’t matter whether the news was correct or not. Instead, it’s a matter of driven public sentiment and hype.
Opinions expressed by important figures in the media are also key influencers of Bitcoin’s price. For instance, when Elon Musk tweeted that Tesla wouldn’t accept Bitcoin anymore, the coin’s price fell in the following days. Meanwhile, if some renowned finance guru expresses their hopefulness about Bitcoin, it can increase demand and, subsequently, the price of Bitcoin.
Various international events also influence investors’ sentiments. For instance, there was a noticeable surge in Bitcoin prices during COVID-19 and the Ukraine war crises. As traditional stocks started losing their worth during these crises, people invested in Bitcoin as a store of value to secure their financial futures.
Besides, rumors, panic, opinions, and speculations become widespread (sometimes aided by the media) during wars and pandemics. These have profound effects on the public mind and thus affect the price of assets like Bitcoin.
Government’s Policies
Most governments of the world didn’t look kindly upon cryptocurrency. It’s natural because cryptocurrencies like Bitcoin are something they cannot control. Plus, criminals often take advantage of crypto coins’ decentralized nature and use them for illegal activities. Therefore, many countries consider Bitcoins illegal, affecting their demand and price.
For instance, China banned Bitcoin and other crypto coins in September 2021. After the ban, the price of Bitcoin plummeted for a couple of weeks. This was because banning the coin meant a huge population no longer had any demand for it.
While many countries are not banning Bitcoin and other similar assets outright, they are building various regulatory infrastructures to control the currency’s circulation passively. Some governments are introducing their cryptocurrency into the market to compete with Bitcoins (for example – Central Bank Digital Currency). These attempts can bring Bitcoin prices down.
Government policies not directly related to Bitcoin can also affect its price. For example, on June 2022, the Federal Reserve raised the country’s short-term interest rates by 0.5 percent. They did this to stimulate economic growth and fight inflation. However, it brought one of the most significant blows to Bitcoin’s price, which decreased by seventy percent in the subsequent days.
At the same time, countries like El Salvador and Slovenia have welcomed Bitcoin as a fully legal currency. Many other governments are also planning to do the same. If more countries adopt Bitcoin like this, its demand will increase and, therefore, the price.
Two Smart Investment Strategies For Bitcoins
Whether or not you should invest in Bitcoin is up to you. There is equally sound logic for and against a Bitcoin investment. So, providing a blatant yes/no answer to this ‘whether or not’ question is impossible. However, if you do decide to invest in Bitcoin, here are two smart strategies to follow:
Diversify Your Portfolio
The best strategy to invest in Bitcoin is not solely to invest in Bitcoin. Putting all your valuable eggs in one basket is not a good idea. In the same way, it isn’t wise to bet only on Bitcoin. Instead, take advantage of all the emerging coins that provide various utilities. So even when Bitcoin’s price falls, you can make up for it with other investments.
You should also remember that Bitcoin is still the most expensive crypto coin on the planet despite its fall from its peak. Even on a bad day, Bitcoin prices hover in the 10-20 thousand dollars per coin range. That’s too expensive for novice and young investors. So, it’s best, to begin with other, more affordable coins.
Hold Your Bitcoins
The people who made the most money from Bitcoin probably had been holding their coins since 2009-2010. Back then, each coin was valued at less than one dollar. This means only within a decade, the 2009-10 investors got a total return of 19000% on their investment!
Although Bitcoin is not as cheap as it used to be, it is still currently underpriced compared to its peak. Many experts are still optimistic that prices will soar soon. One of the reasons for the speculation is the imminent Bitcoin halving that will happen in 2024.
Even without that, Bitcoin can be a viable long-term investment. You can tuck a few Bitcoins away in a cold wallet somewhere. Decades from now, the prices will surge when no Bitcoin is left to mine. You (or your children) will then get an insane return on this investment.
Conclusion
As an investor, you should rely on your education and experience to decide where you should put your money. Blindly following advice from so-called experts and gurus won’t build you up for the game.
Participating in forums and keeping updated with the latest market news will help broaden your perceptions. A legit course can guide you if you are a beginner. After that, you will be sufficient to decide whether to put your money in Bitcoin.
About the author – D. Schmidt
I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.
