Bitcoin (BTC), the world’s most renowned cryptocurrency is in the trend everywhere. Since the cryptocurrency first showed up in 2009, after then, the financial investors started to considerable spikes in value until it became the world’s most popular cryptocurrency.
The pricing of bitcoins fluctuate most of the time which is no doubt. However, unlike stock options or bank bonds, Bitcoins aren’t issued by a bank or any central authority. As a result, this doesn’t involve factors such as inflation rates, economic growth, and other related factors. Instead, the price of Bitcoin is influenced and ultimately determined by the following four factors:
- The supply and demand of Bitcoin in the world economic market
- The cost of producing a single Bitcoin token through the traditional mining process
- The rewards given to miners for verifying any blockchain transaction
- The number, and prices, of competing cryptocurrencies
1. Supply and Demand
Abundantly available, the supply of Bitcoin has been dwindling from since the very day it showed up. The protocol of cryptocurrency places strict limits on the production of new tokens, with the rate slowing down over time. For example, it went from 6.9% in 2016 to 4.4% in 2017.
Halving also plays a vital role in the supply and demand rule. Halving events, which take place about every four years, reduce the rewards miners get for processing an entire block and slow down the production process as a whole. These events generally result in a significant hike in BTC price because it means the already low supply has been reduced even further.
2. Cost of Production
Mining Bitcoin consists of miners solving a complex math problem, with the first one to solve it being rewarded with newly-minted Bitcoins. This means spending money on direct infrastructure, the hardware you’re going to need for mining, and expensive electricity bills that often end up at 95% of the project’s total costs.
It only becomes more difficult to mine Bitcoin by the day as time goes on. More processing power for those using brute force means investment into hardware, and more complex algorithms slow down the production process and reduce overall supply, thereby increasing the price of Bitcoin.
3. Lucrative Rewards in Bitcoin Mining
We’ve already explained this point, but we’ll still provide a slight touch-up: halving events, which happen every four years, reduce the rewards given to miners for authenticating an entire set on the blockchain. Miners earning less Bitcoin and halving events reduce the supply of Bitcoin and drive the price up over time.
4. Competing Cryptocurrencies
Bitcoin’s dominance over the crypto markets remains unchallenged, and it’s even the token most commonly traded on well-known crypto exchanges click here.
While Bitcoin is the most well-known cryptocurrency there are hundreds of other cryptocurrencies competing for the attention and monetary value held by Bitcoin. Today, Bitcoin holds less than 50% of the overall market capitalization of crypto markets because of other cryptos that have been almost as successful.
Ether (ETH) is a perfect example of the competition faced by Bitcoin. Ether, from Ethereum, holds the potential for changing the entire world’s financial structure and other infrastructural marvels thereof, which is why many investors are choosing to invest in Ether. Currently, it holds about 18% of market capitalization in crypto markets. Besides such cryptocurrencies, there’s also XRP, a centralized token from Ripple Labs, and ADA from Cardano, both of which have shown steady hikes in price over the last couple of years.
Apart from the factors mentioned above, the regulatory development and news mostly matter in Bitcoins, or even other cryptocurrencies, often affect the market severely but go unnoticed. For example, China’s previous prohibition of cryptocurrencies resulted in a tremendous price crash for BTC. News developments that directly impact the price of Bitcoin can be of various types: different forks in BTC, altering the number of coins in existence, and even the split of Bitcoin’s blockchain into Bitcoin Cash affects the price of Bitcoin. These factors, at the end of the day, end up playing essential roles in determining of the market price of bitcoin and other cryptocurrencies.