Bitcoin reached a high in April 2021, topping $63k per coin. However, it has dipped almost by half to $36k in one month. It started October around $48k and climbed to $68k at the beginning of November. The massive volatility and unpredictability make it hard to predict the price of Bitcoin. Luckily, some factors significantly impact price. As an investor, understanding these factors will help predict the future price of bitcoin and strategize accordingly. In this article, we will explore major factors that significantly determine the price of bitcoin. Let's get started.
8 Factors That Determine Bitcoin Price
1. Mainstream Adoption
Bitcoin is a popular digital currency for online transactions. The adoption of bitcoin as a preferred payment method could boost its demand. The popularity and demand, in turn, push the price higher.
Here is an interesting point. Adoption by leading financial companies could propel the price of bitcoin to new highs. For instance, Visa has announced plans to use cryptocurrencies for payment. Similarly, MasterCard is also planning to integrate cryptocurrencies into its platform.
Besides the international payment companies, other companies are also incorporating bitcoin and other cryptocurrencies into their services. For instance, Blackrock, a leading asset management firm in the United States, has started trading bitcoin.
In March 2021, Elon musk announced that people could acquire a Tesla using bitcoin. This news boosted the bitcoin price significantly. The company also announced that it had purchased bitcoin for risk management.
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2. Cryptocurrency regulations
Perhaps the leading factor that will affect the price of bitcoin significantly is the government regulations. The seismic growth of the cryptocurrency industry has caught the attention of market regulators. Governments are keeping an eye on cryptocurrency because of its association with illegal trade, such as money laundering. While bitcoin is not restricted in many countries, some states have placed a complete ban on bitcoin trade.
Remember, decentralization is one of the reasons why many people endear cryptocurrency. This means that people can transact with the virtual currency without government interference. Therefore, government scrutiny would make bitcoin less popular. Additionally, the Bitcoin ban, as it happened in Nigeria and India, could spell doom to the price of digital currencies.
Regulation confusion has also created uncertainty in bitcoin. While the US Commodity Futures Trading and Commission classified bitcoin as a commodity, the Security and exchange commission puts bitcoin in the securities category. Although bitcoin is experiencing a surging market capitalization, this confusion over which regulator will define cryptocurrency rules could affect the price adversely.
On the bright side, numerous financial products that use bitcoin as an underlying asset, such as futures, ETFs, and other derivatives, are being rolled out. The products could strengthen the industry and push bitcoin prices higher.
One of the factors that will significantly affect the price of bitcoin is competition. While bitcoin is currently the most popular and valuable cryptocurrency, thousands of digital tokens give bitcoin a run for its money. Altcoins like Ethereum, Binance Coin, Polkadot, Cardano, and Tether are on steady growth. This means that these cryptocurrencies could eat into the already dominant Bitcoin market capitalization.
Since market entry barriers are relatively few, new Initial coin offerings (ICOs) are just around the corner. The widespread competition is likely to lower the price of bitcoin, which is good news to buyers. However, the high visibility of bitcoin gives it an edge over the rest of the cryptocurrencies.
4. Expert Analysis
Changing trends come with emerging possibilities. Therefore, it becomes hard to know how the bitcoin price will fare in the future. In fact, it is impossible to forecast the future price of an asset with utmost certainty. However, investors rely on prediction to get a clear picture of the price direction. With the increasing popularity of bitcoin use among investors, companies, and individuals, predictions are becoming more important.
Expert analysis will also significantly affect the price of bitcoin. For instance, last year JPMorgan chase bank leaked a report predicting that bitcoin could reach $318 000 by the end of 2021. Morgan Stanley, a popular investment bank, recommends bitcoin to high net worth investors who plan to diversify their portfolio risk. And lastly, CryptoPredictions forecasts for Bitcoin to most likely surpass the 100 000 USD mark by the end of this year. These predictions boost investor confidence and, in turn boosting its popularity. The increased demand, pushing the price of the virtual currency higher.
The predictions are likely to influence investors’ decisions on bitcoin investment. In other words, Positive predictions are likely to give investors confidence to invest in bitcoin, pushing the price up.
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5. Supply and Demand
The supply and demand impact the price of an asset. For instance, central banks can determine the exchange rate through open market operations, discount rate adjustment, and changes in reserve requirements.
There are two ways of limiting the bitcoin supply. First, bitcoin is created through a fixed rate which lowers over time. For instance, the rate changed from 4.4% in 2017 to 4.0 in 2018. Therefore, the demand increases faster than the supply.
The second way which limits the supply of bitcoin is the fixed number of bitcoins in circulation. The total supply limit is capped at 21 million. Once this maximum is reached, the price will depend on the cryptocurrency’s legality, practicality, and demand. The price will also be affected by the demand for other cryptocurrencies.
When the supply is lower than demand, the price shoots upwards. Therefore, the price of bitcoin is likely to increase as supply approaches its maximum limit.
6. Availability on Currency Exchanges
While stocks are traded on indexes like the Nasdaq and NYSE, cryptocurrency trading occurs on crypto exchanges. The most common exchanges are GDAX and Coinbase. They allow traders to exchange bitcoin for fiat currencies like United States dollars. The popularity of the exchanges makes it easy for market participants to access the cryptocurrency. Additionally, it could help set securities regulations. Despite the legal gray area in bitcoin operations, the legal compliance set by these exchanges could strengthen the cryptocurrencies and, in turn, boost their price.
7. Mining rewards
The mining reward is halved after every 210000 blocks mined, which takes roughly four years. The last halving occurred on May 11, 2020. The current block reward is 6.25 BTC from 50 BTC in 2009. The halving always triggers a boom and bust scenario that ultimately pushes the price up. Remember, the price is based on scarcity. The maximum bitcoin supply is 21 million. With a current circulation of 18,715,050, the remaining bitcoin left for mining is slightly above 2.284 million.
Having reduces lowers bitcoin supply by lowering the rate of creating new coins. The reducing supply has caused price proliferation. For instance, the first halving pushed bitcoin from $12 to 1207 in 2013, while the price soared from $647 to $1934 after the second halving in 2017. After the most recent halving, the price of bitcoin surged from $8821 in May to $63558 in April, represented a 651% price increase.
Read More: How Does Bitcoin Mining Work?
8. Cost of production
Bitcoin has a real cost of production, albeit its virtual nature. Electricity is the leading expense in bitcoin mining. Also, mining bitcoin involves solving a complicated cryptographic math problem. The winner is rewarded with a block of bitcoin. The algorithm is designed to allow only one winner after approximately every 10 minutes. Therefore, the more the miners, the more difficult and expensive it becomes to solve the problem. According to research, the marginal cost of production affects the price significantly.
Predicting the price of bitcoin accurately is almost impossible. However, there are main factors that can significantly affect its price. For instance, government regulations and bitcoin adoption will majorly determine the future price of Bitcoin. These events form the basis of fundamental analysis. Therefore keeping up to date with the new regulations and legal development surrounding bitcoin could greatly help you predict the likely price of bitcoin. In a nutshell, understanding the factors that impact Bitcoin price will make you a better investor.
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