One central question that buzzes through our brains when we first wake in the morning is what the Bitcoin rate would have become between night and morning. This is hinged on the extreme volatility of the cryptocurrency, whose trade doesn’t go to sleep.
In 2009, NewLibertyStandard, an influential forum user, gave Bitcoin its first exchange rate: 1 USD = 1,309.03 BTC. Since then, Bitcoin has hit an all-time high of $66,000 and sits just above the $60,000 mark at the time of writing.
In this article, we will be exhausting five (5) major determining factors of the Bitcoin rate.
1. Demand And Supply
The law of demand and supply is something we must have come to terms with within our elementary economics classes. Almost everything of value follows the law; Bitcoin is not an exception. The law of demand and supply sells three core ideas:
- The law of demand: the higher the price, the lower the demand
- The law of supply: the higher the price, the more sellers will supply more of an economic good
- The interception: together, they determine the market price and the volume of a particular good
How is this applicable to Bitcoin? There are two significant features of Bitcoin that are affected by these concepts:
a) The rate at which new Bitcoin was created
Bitcoin is allowed to be made at a fixed rate with the current protocol. To our general understanding, a new Bitcoin is created and introduced to the market when Bitcoin is mined to process blocks of transactions. Although many people don’t understand that this process is designed to slow over time, it is popularly called Bitcoin halving. This, in most cases, can lead to Bitcoin demand increasing faster than the supply. This causes the price to rise.
b) Bitcoin supply cap
Satoshi Nakomoto designed Bitcoin to have a cap of 21 million Bitcoin. Once that cap is reached, miners will no longer be rewarded with new Bitcoin for transaction verification. When this happens, the halving of block rewards every four years may not impact the Bitcoin rate. But factors like usability and practicality in everyday life will determine the Bitcoin rate.
2. Bitcoin’s Competition
Bitcoin has always retained its reputation as the world’s most popular and recognised cryptocurrency. However, thousands of other cryptocurrencies out there, like Ethereum and Dogecoin, are thriving in the crypto space also to get our attention.
This has called for more diversity in the crypto market, offering investors a wide range of options. However, because of its competition, the Bitcoin rate can stay pretty grounded. It is noteworthy that if Bitcoin were the only cryptocurrency out there, the price could look different.
3. Media Visibility And Coverage
The media play a pivotal role in the world we live in today, and it also pitches the Bitcoin rate. Many studies have elucidated the nexus between Bitcoin and the media. Still, in simple terms, the theory is that positive media attention is a possible answer to why the Bitcoin rate is rising. In contrast, negative attention can lead to price dips.
On a broad scale, the media is believed to give people a better understanding of Bitcoin’s basic functionality, leading more people to be attracted to the idea and invest in it. In today’s age of social media, any crypto news has the potential to affect the Bitcoin rate in the capital market.
4. Cost Of Production
Although Bitcoin is exclusively a digital asset, it is still a product that needs to be produced. Chiefly, the cost of producing Bitcoin is a derivative of the mining process’s electrical consumption.
Bitcoin mining is a process in which miners solve complex cryptographic math problems and are rewarded with newly-minted Bitcoin. Miners often use vast amounts of electricity to solve these math problems, which are integrated into the Bitcoin rate. But the narrative is changing with a country like El Salvador using the energy from the volcano to mine Bitcoin.
A single block takes an average of 10 minutes to verify. The competition gets on the rise when more miners join. As competition increases, solving math problems becomes more difficult. When that problem becomes more complex, solving it becomes more expensive, especially if you want to keep up with the 10-minute interval.
5. Regulations On Sales
With Bitcoin being a relatively new form of asset, regulators have long debated how to classify it. It is often classified as a digital currency and not a fiat currency. Due to this assertion, it continues to pose difficulty for governments to have a position on them. There are dynamics of regulations such as taxation, among other things.
Furthermore, since Bitcoin is decentralised—meaning any specific central government does not bind it, the regulations can directly impact the Bitcoin rate because they apply to investors. Nonetheless, the Bitcoin rate might suffer if there is fear about a particular government statement or decision. For instance, the Bitcoin rate fell following the suspension of Bitcoin trade and investment by the Chinese government.
The regulations imposed on Bitcoin differ vastly depending on a country’s ideology about the coin. In some cases, if the regulators have a neutral outlook on Bitcoin, KYC (Know Your Customer) and AML (anti-money laundering) rules will be imposed on high-volume traders and investors.
Consequently, situations like that can give existential threats to both old and new investors. When investors are unsure about the regulatory instances, the Bitcoin rate could decrease because of their fear.
Despite these being some of the more significant factors that influence Bitcoin’s current rate, it is essential to understand that these cryptocurrencies are not fully mature, which translates to the fact that they can still change over time. When and how it will change is what can’t be perfectly predicted.