Bitcoin Price Determination Explained In 2 Minutes
What determines the price of Bitcoin?
How is the price of Bitcoin set?
Does it trade like stocks? Do central Governments determine the price?
Well, it is neither.
Bitcoin is a decentralized digital currency, transferable from peer-to-peer (P2P) without any intervention from an intermediary. Instead of central banks or any other administrator, transactions are verified by network nodes through cryptography on distributed public ledgers called blockchains.
The main factors influencing the price of Bitcoin are –
- Bitcoin supply and market demand
- Production cost through mining
- The number of competitors
- Sales regulations
Let’s take a glance at each of these influencing factors.
Bitcoin supply and market demand-
The Bitcoin protocol allows the introduction of new coins at a fixed rate, but the rate of coins introduced slows down over time. This creates a higher demand for bitcoins, and prices increase. The supply is also impacted by capping the number of bitcoins that can be mined to 21 million. As of December 2020, 18.587 million coins have been mined.
Production cost through mining-
Bitcoin prices are closely related to its production costs. Production of the bitcoins or “mining” as it is known requires programmers to solve complex math problems in ten-minute periods to mine a set of bitcoins. The more the miners, the more complex the problems become and the higher the production cost.
The number of competitors-
Bitcoin faces a serious challenge from other cryptocurrencies like including Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT). High competition usually leads to lower prices, but in this case, Bitcoin has an advantage due to its high market visibility.
Sales regulation-
Its rapid popularity has prompted authorities to debate how to regulate digital assets. The Securities and Exchange Commission (SEC) considers cryptocurrencies to be securities, while the U.S. Commodity Futures Trading Commission (CFTC) treats them as commodities. It has led to uncertainty sparking volatility in its pricing.
Bitcoin prices are prone to fluctuation. Availability, speculation, and media coverage are major contributing factors. Negative press can prompt bitcoin owners to sell shares out of panic, thereby driving down its price and vice versa. Many individuals and institutions have lost faith in their currencies. They have diversified into cryptocurrency as an investment and a medium of exchange. No matter how volatile its pricing might seem, Bitcoin is a trendsetter in the world of financial transactions, and it can well be the future.
