What are the major factors that affect the Bitcoin price?
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Bitcoin is the first most popular digital cryptocurrency
whose price is influenced by a wide range of factors. Due to a growing market
share of Bitcoin, a rapidly increasing price of Bitcoin and its high price
volatility, there is an increasing interest among users and academics in
understanding the Bitcoin system in general and its price formation in
particular.
The price of Bitcoin surged strongly and reached $1,900 on
11 May 2017 , and this robust appreciation grabbed the attention of many
experts and market observers who provided a wide range of explanations for this
climb, as follows:
1. Bitcoin Demand and Supply
Based on economic theory, the supply and demand of Bitcoin
decide its price. This means that high demand and low supply of Bitcoin often
leads to an increase in the price. Note that Bitcoin has a controlled supply
whereby the total number of Bitcoin in circulation must never be more than 21
million. Due to the limited supply, there are speculations that the Bitcoin
price will continue to rise with time.
2. Government Regulation
Ever since Bitcoin started to become popular, governments
and financial regulators have tried to restrict and even ban the
cryptocurrency. With time, though, they started to consider Bitcoin regulation
instead of banning it. It’s still not easy and the road to Bitcoin regulation
has faced many problems. Given that Bitcoin is the most popular cryptocurrency,
Bitcoin regulation would be the most effective way of keeping cryptocurrency
under control.
Each time a government releases official statements about
the regulation of digital currencies, the price of Bitcoin is normally affected.
Government regulation of Bitcoin should be viewed as a welcomed symbol of
confidence, as opposed an attack on the virtual currency; because regulation of
the Bitcoin markets imply that the government sees the legitimate value of
Bitcoin, and not just as an instrument for criminal activity.
3. Media Influence
The media can also influence the Bitcoin price
significantly. Media hype can easily lead to an increase in the price, while
negative news can lead to a decline in the price. For instance, news about
bankruptcy or hacks on Bitcoin-related websites and services can cause panic
and disruption among Bitcoin users, leading to price dips. Negative news about
government involvement and regulations as well as news on the use of Bitcoin in
illegal dealings such as drug transactions and money laundering tends to have
the same impact on the Bitcoin price.
Moreover, social media has been a huge player in the rising
stock price of Bitcoin. A recent study shows that the price of Bitcoin is
directly influenced by the use of social media.
4. Stability of the Bitcoin Network
Stability of the Bitcoin network is a major factor that most
Bitcoin enthusiasts are concerned about. Most people want a secure network
where they will not lose their money. Unlike the conventional currencies like
Euros and Dollars, Bitcoins are largely perceived as economic bubbles as they
are only valuable when exchanged with other currencies, but do not have any
inherent value on their own. If most people and business organizations stopped
accepting Bitcoins, the “bubble” would burst, leading to a fall in the Bitcoin
price.
5. Financial and Political Instability
There’re various kinds of instability and risks that make currencies
less attractive for large investors, and alternative investment instruments
(gold and cryptocurrencies, primarily Bitcoin) cause them much greater
enthusiasm. This statement is also applicable in the case of global sources of
instability, and in the case of instability at the national level.
If large investors push macroeconomic instability to bitcoin
investments, the negative phenomena in the banking sector and the excessive
state control over the movement of capital (primarily in the sphere of cash
circulation) are pushing to exchange Fiat for the Bitcoin of many middle-class
investors. In particular, this is relevant for developed Western countries,
where low economic growth rates and the state's propensity to strengthen
economic paternalism serve as a source of low interest on bank deposits and
increasing pressure on cash.
6. Wider Mainstream Acceptance
This is another major factor that influences the price of
this cryptocurrency significantly. Even if it has faced a number of challenges
and detractors, many well-known companies and businesses have started accepting
bitcoins as a means of transaction. An increase in the number of venders
accepting this type of currency will definitely lead to an increase in the
price of Bitcoin.
7. Technological Changes and Innovations
Technological advancement and innovations also have the
ability to influence the bitcoin price. For instance, the integration of Bitcoin
in PayPal’s payment system has raised awareness and stimulated a lot of
interest in digital currencies among most people. Moreover, many startups have
also started utilizing crowdfunding platforms which accept crypto-currencies,
with Ethereum being the best example.
8. Market Manipulation
This is another major factor that can influence the Bitcoin
price. For instance, traders can sometimes purchase huge chunks of Bitcoin from
the market so as to make the price to appear like it is rising before dumping
them back to the market, hence making unheard-of profits from the same. Extreme
cases such as a 51 percent mining attack or the release of Bitcoin codes due to
hacking can also dramatically affect the bitcoin price as most people will be
compelled to sell their bitcoins in fear of making loses.
The bottom line:
Bitcoin as a payment system will become easier, more
convenient and more legitimate this year, which will additionally increase the
number of new users. The pushes and pulls on the Bitcoin price are diverse. Understanding
these factors can help us to be more comfortable with the price fluctuations
and make informed decisions at the right time.
Fi24h Editorial Board
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