Cryptocurrencies

Factors Influencing Bitcoin’s Price

Factors Influencing Bitcoin’s Price
Written by Mary Ann Callahan

With the development of new technologies, we rely on digital instruments and systems more as they make our lives easier. Recent tendencies, as practice shows, may turn around our perception of financial operations as well as the role of traditional institutions. When mistrust and need for change take place, cryptocurrencies – and Bitcoin as the most prominent one – steal the show.

If you don’t understand the hype and battles between Bitcoin (BTC) lovers and haters, we will try to make your life easier. It may seem a tricky issue, but we are here to find out the secrets of the Bitcoin price volatility.

Why Bitcoin enjoys great demand

Despite all the skepticism, cryptocurrencies have been recognized as a promising alternative to existing financial instruments. There are several features that make Bitcoin the most discussed and invested virtual currency.

  1. Anonymity. While Bitcoin itself does not guarantee perfect anonymity, users can hold multiple BTC addresses, not linked to any personal information. Also, multiple wallets, online wallets, and mixing services can be used to keep financial privacy.
  2. Decentralization. The Bitcoin network has no central control. If you use fiat currency, your life is always influenced by the actions of banks and governments. When it comes to BTC, only participants define the rules of the game. While a user of traditional money is always forced to use centralized service, BTC owner is never obliged to do so.
  3. Broad application. Bitcoin and blockchain technology are, in fact, important not only in the financial sphere. They may bring potential enhancements to property trading, insurance claims, document stamping and auditing, settlements and customer rewards, etc.
  4. Hedge against risks. Digital currency is a good option for people who live in countries like China, – where the risk of devaluation is a pressing issue. Experts have even noticed a negative correlation between the dollar value of Bitcoin and the Yuan.
  5. Easy, fast and open. BTC account can be set up in minutes and you don’t need to be an accredited investor to participate. The access to investment is instant, as well as the speed of transactions. In prospect, Bitcoin has the potential to become a simpler and cheaper option for overseas transfers.

Factors Influencing Bitcoin’s Price Volatility

Volatility can spoil the party

Volatility refers to the amount of uncertainty or risk about the changes in a security’s value. As you have already heard in the news, the swings of Bitcoin’s price are always in the highlight. In 2017, it captured headlines climbing from $5,000 in November to $19,000 in December. This is not surprising.

In fact, the value of cryptocurrency is shaped by those who own, buy and sell it. So, the price is determined by the variety of factors and is almost unpredictable. The only thing investors have to rely on is hope… and hype. Some pundits state the abnormal volatility of Bitcoin and its alternatives make cryptocurrency not fit as a means of exchange. A number of retailers (e.g. Steam – the world’s biggest video-game service) refused to accept crypto for this reason.

   

What influences Bitcoin’s price

As we’ve stated above, the Bitcoin price is not controlled by any organization, company or government. However, there are several influential factors which help traders and analysts predict potential drops and rises. Here are several key aspects we should watch out for.

  1. Basic principles of supply and demand

As with gold, BTC prices are formed as per cost of mining. In the case of cryptocurrency, mining means the calculation of certain equations for obtaining new Bitсoins. Moreover, the reason for rising prices is high demand and low supply. Since the number of Bitcoins is limited to 21 million, there is a high probability that the cost will only increase.

Factors Influencing Bitcoin’s Price Volatility

  1. Implementation of government regulations

Changes in Bitcoin prices are observed at any time when the government tries taking regulatory measures to officially control cryptocurrency. For example, countries such as the United States, Japan, the United Kingdom and Canada have already taken certain steps to regulate the crypto market for their citizens.

Also, when the crisis in Cyprus led to the collapse of the country’s banking system and drove its economy into a pre-default state, discussions about Bitcoin being a good option for the new currency burst out. Analysts expect future fluctuations as soon as governments impose bans and rules on the cryptomarket.

  1. Technological changes or hard forks

Addition of new functionalities and improvements to the old ones also sparkle interest to virtual currencies. The instances which justify this statement include integration of Bitcoin with PayPal, Blockstream popularity, and using crypto for crowdfunding startups.

A hard fork is another important game-changer. You should remember that, when you see information about the upcoming hard fork, expect Bitcoin’s price fluctuations. Everyone wants to get free money when a new copy of the existing blockchain is made. Anyone holding coins on the original chain will hold an equal number of the coins on the new chain by default. So, as a rule, people buy more cryptocurrency in this period and the price goes up.

On the other hand, forks can be tricky and, as a result, divide the cryptocurrency community into two opposing camps. In this case, the price is likely to fall even before the fork.

  1. Increased media attention

It may sound unconvincing, but many experts see a connection between Trump’s tweets and Bitcoin’s fluctuations. Sooner or later, governments will start creating new regulations concerning Bitcoin, and BTC may be treated as an ‘anti-dollar’ currency in the USA. If something like this happens, you know where to look for entry signals.

News and tweets also change minds of people engaged in the Bitcoin rush. Bad news makes owners sell BTC quickly and for lower prices – so the value drops. Good news motivates people to buy BTC for higher prices to get it ASAP – as the result, the price rises.

  1. The mindset of crypto owners

Essentially, the value of the cryptocurrency is created and supported by people’s actions – especially high-rollers. Moreover, the leadership of Bitcoin is not provided by its unique features – its main fuel is people who trust in it. So, the best way to stay in touch with the latest tendencies is to study discussions, chats, forums, and personal opinions of digital influencers.

To Invest or Not To Invest?

If you still cannot answer this question, here are 3 pros and cons of investing in Bitcoin.

+ It is easy. To invest in BTC, you should just buy it on an online exchange and be on the lookout for price fluctuations.

+ It is independent. Since many people do not trust traditional financial institutions and governments, Bitcoin seems to be a good hedge.

+ It is likely to go up. Experts have predictions that the BTC price will only rise, hitting astronomical levels.

BUT

– It is unstable. The value of cryptocurrencies shifts unexpectedly and wildly. Bitcoin proves to be reasonable in countries like Zimbabwe, where local currency is worthless. But it’s still questionable, whether investing in crypto is wise in the US and Europe.

– It is intangible. Frankly, Bitcoin is nothing more than a computer code. It isn’t backed by property or anything real – its value is based on trust. So, in the worst-case scenario, it can become worthless.

– It is not the best. Bitcoin enjoys the biggest popularity on the market. However, altcoins like Ethereum, Ripple, and Litecoin have proven to be faster and more flexible. With such strong opponents, BTC will not be a leader forever.

History often repeats itself, but the Bitcoin phenomenon is more complex than a ‘dot-com bubble’, which left many people holding an empty bag. All in all, there is still a lesson you can learn from the ‘bubble’ burst in 2000-2001. Don’t invest more money than you can afford to lose. And, in addition, speak to a financial advisor if you want to make your decisions balanced.

About the author

Mary Ann Callahan

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