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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