If you’re thinking of looking into cryptocurrencies as a potential source of additional income, the first thing you should be aware of and keep in mind is that their prices are quite erratic.
Bitcoin, the first and most widely used cryptocurrency to date, is especially known for this risk and volatility. This means that its price and value changes and movements are highly unpredictable, placing it under the high-risk category in terms of investment options.
However, this very unpredictability is also what’s most alluring for many traders and investors. The possibility of a sudden spike in the currency’s value (as has happened quite a few times historically) can be quite alluring. That in itself, they would say, is definitely worth the risk.
Nevertheless, it is important for everyone–whether newbies or “veterans” and “experts”–to approach this kind of venture with utmost caution. After all, it involves your hard-earned money.
One way to do this is by learning and understanding the factors that can affect Bitcoin price. Since Bitcoin is neither issued nor regulated by any government entity, it is not affected by the usual factors influencing a currency’s value such as economic growth indicators and monetary policy tools. Instead, it is influenced mostly by the following:
Bitcoin Supply and Market Demand
As with commodities, the price of Bitcoin is also affected by supply and demand. To date, the maximum supply of Bitcoins that can be mined is set at 21 million. As of March 2023, more than 19 million have been mined. With just over 1.5 million left for mining, experts have estimated that this would be exhausted by 2140. Once the limit is reached, no new Bitcoin can be mined.
This cap was hard-coded into Bitcoin’s protocol by its creator/s, credited via the pseudonym “Satoshi Nakamoto”. It was set to make sure that Bitcoin remains scarce and free from the manipulation to which traditional currencies are susceptible. It also ensures that there will be no risk of inflation, which usually results from a decrease in a currency’s purchasing power due to an increase in its supply.
Overall, a “scarce asset” or one with finite supply is more likely to have a higher price, especially if there is an increase in demand. This demand can also be influenced by a number of factors such as increased media coverage and endorsements from “experts” in the field of finance and investments. Through the years, demand for Bitcoin also increased in countries with devalued currencies and high inflation rates, as well as, unfortunately, among those who conduct financial transactions for illegal activities.
Major Events and Regulatory Environment
Significant developments such as regulatory changes, breaches in security, macroeconomic updates, technological advancements, process improvements (especially in terms of speed and efficiency), and other important happenings within and around the Bitcoin community also have an impact on Bitcoin prices.
While Bitcoin is technically free from government regulations, its price is still largely affected by regulatory changes, such as the cryptocurrency rulings delivered by the US Securities and Exchange Commission (SEC). Trading and transaction bans can also affect supply and demand. In China, for instance, a ban on cryptocurrency operations was enforced in September 2021.
Miners were forced to move their operations to other countries, causing Bitcoin prices to fall from about $51,000 to about $41,000 by the end of the month. However, as miners began to settle into their new locations and pick up their groove, Bitcoin even exceeded its pre-ban rate.
Publicity
News, whether positive or negative, can also affect prices. For instance, unfavorable news regarding Bitcoin’s long-term value, security, and effects on the environment (due to the high power consumption involved in Bitcoin mining) usually causes Bitcoin’s overall market price value to drop. However, as earlier mentioned, positive publicity can drive up the demand and increase its prices.
Competing Cryptocurrencies
While Bitcoin still leads cryptocurrency trading markets as of 2024, its market capitalization has waned over time. For instance, from a market share of more than 80% in 2017, it is now down to less than 55%, according to CoinMarketCap.
This decline is partly due to the increasing number and popularity of other cryptocurrencies. Ethereum, for instance, is attracting more and more investors, thanks to the upsurge of decentralized finance (DeFi) applications. It currently accounts for around 15% of the overall market capitalization in cryptocurrency markets.
More cryptocurrencies such as Dogecoin, USDCoin, Tether, BNB, and Solana are also continuously making their way up the scale and taking up more of the market share that used to be almost exclusively Bitcoin’s.
Usage
Increased Bitcoin usage, along with its integration into more banking platforms and payment systems, can increase the demand for Bitcoins and push its price up. More avenues to make use of this currency can help entice more people to invest and drive up its market demand and value.
All of these factors, among many others, can influence Bitcoin prices. Those who wish to delve into Bitcoin or any cryptocurrency venture must always keep an eye out for these indicators to be able to make sound and timely decisions when it comes to their investments.