What Determines the Price of Cryptocurrency?

Bitcoin, the title given by the unspecified creator of this adequate currency, is a crypto-currency developed in 2009 by Satoshi Nakamoto. The transactions are noted in a blockchain showing each unit’s historical transaction and are used to demonstrate ownership.

Unlike traditional investments in currencies, Bitcoin does not come from or be supported by a central bank. And the purchase of bitcoin is not the purchase of a stock or bond, as bitcoin is not a company. As a result, no corporate balance sheets or Form 10-Ks are required for review.


Bitcoin facts

  • Purchasing stocks will give you ownership in a firm while buying Bitcoin will give you that ownership.
  • Bitcoin is not issued by or regulated by a central government and is thus not subject to state monetary policies.
  • Bitcoin prices are mainly influenced by supply, market demand, availability, and competitive cryptocurrencies.
  • Around 88.5% of the total bitcoin supply was mined by December 2020.

Contrary to conventional currency investments, Bitcoin is not issued from or supported by a central bank; therefore, inflation rates, economic growth, and measurements of monetary policy, which typically influence currency rates, do not apply to Bitcoin.

Let us see what factors affect the price of cryptocurrency:

What determines the price of cryptocurrency?

Cryptocurrency price is determined by:

  • Cryptocurrency supply and the demand of the market
  • Legal regulation in crypto trading impacts the price
  • The cost of cryptocurrency production through mining
  • The number of cryptocurrencies in the crypto market
  • The exchanges it trades in its sales regulations
  • Its internal administration
  • US dollar value and US inflation because the crypto price is usually compared with the dollar (for example, BTC/USD)

Crypto Demand and Supply

By modifying the discount rate, reserve requirements, or open market operations, countries without fixed exchange rates may control, in part, how much of their currency flows. The central bank may influence the exchange rate of a currency with these options.

Bitcoin supply is affected in two different ways. Firstly, the Bitcoin agreement permits the secure creation of the latest bitcoins. When the mining process stops transactions, and the value at which the latest coins are set is designed to slow over time, new bitcoins are introduced on the market. Growth, for instance, decreased from 6.9% (2016) to 4.4% (2017) to 4.0%. (2018). 1 This can create scenarios where Bitcoin demand rises faster than supply, increasing prices. Due to halving the block benefits offered to Bitcoin miners, the slowdown in circulation growth can be considered artificial inflation for the cryptocurrency ecosystem.

Second, the number of bitcoins the system allows might also affect the supply. Again, this figure is limited to 21 million, where scraping is no longer the newest bitcoins once this number has been achieved. For example, Bitcoin supply reached 18,587 million in December 2020, which accounts for 88.5% of Bitcoin supply to be ultimately provided. 2 Once 21 million bitcoins are in circulation, the rates depend on whether the popularity of other cryptocurrencies is determined by practical (ready-to-use transactions) and legal considerations.

On June 9th, 2021, El Salvador issued a bid to Bitcoin. 3 The country is the first to do that. For each transaction the company can accept, cryptocurrency can be used. The US dollar remains El Salvador’s primary currency.

Half of the block premium’s artificial inflation mechanism will no longer impact the cryptocurrency price. However, the last bitcoin will not be mined until 2140 or so with the current rate of block reward adjustment.

Crypto Competition

Although Bitcoin is probably the most known cryptocurrency, hundreds of other tokens are aimed at users. While Bitcoin remains the dominant market capitalization option, Ethereum (ETH), Altcoins including Tether (USDT), Cardano (ADA), Binance Coin (BNB), and Polkadot (DOT) are some of its nearest competitors in March 2021. 4 Further, due to relatively few barriers to entry, new original coin offers (ICOs) are constantly on the horizon. The crowded field is good news for investors because widespread competitiveness keeps prices down. Fortunately, the high visibility of Bitcoin offers it an edge over its contestants.

Cost of Production

While Bitcoins are virtual but still products produced and incur actual production costs—the most critical factor being electricity consumption, in addition, Bitcoin’s so-called “scraping” relies on a complicated encryption math problem that mineworkers all compete to solve, the first one being awarded a block of newly mined bitcoins with any transaction fees collected since the last block.

In contrast to other products, the Bitcoin algorithm allows only one block of Bitcoin once every ten minutes on average. So, the only thing unique about Bitcoin production is that. Unfortunately, this means that more producers (miners) competing for mathematical solutions will make it more complicated and costly to solve this problem and maintain that 10-minute interval.

Research has shown that the market price of Bitcoin is closely associated with its marginal production costs.

Feasibility of Currency Exchanges

As equity investors traded stocks in NYSE, Nasdaq, and FTSE, so do cryptocurrencies, investors on the Coin Bases, GDAX, and other bonds. These platforms allow investors to trade the equivalent of cryptocurrency and currency (e.g., BTC/USD, Bitcoin/US dollar), like traditional monetary exchanges.

The more popular an exchange becomes, the simpler it can create a network effect among additional participants. And it can establish rules for how other currencies are added by capitalizing on their market influence. The publication of the Simple Future Tokens Agreement (SAFT) framework, for instance, seeks, in particular, to define how securities regulations can be complied with by ICOs. The presence of Bitcoin in these interchanges implies a degree of regulation in which script currencies operate irrespective of the legal grey area.

Crypto Legal Matters and Regulations

The rapid popularity of Bitcoin and cryptocurrencies has led policymakers to discuss how these digital assets can be classified. While the Exchange and Securities Board (SEC) identifies cryptocurrencies as securities, Bitcoin is considered a commodity by the United States Commodity Futures Trading Board (CFTC). Despite the rising capitalization of the market, this confusion over which the regulation establishes rules on cryptocurrencies has confused.

In addition, the market saw a wide range of financial products, including exchange-traded funds, futures, and other derivatives, which use Bitcoin for their underlying assets.

This can have a double impact on prices. First, it offers access to Bitcoin for investors who can afford to buy a real Bitcoin, so the demand increases. Second, it can decrease price volatility by enabling investment banks who think that Bitcoin’s future is overvalued or undervalued to make ways for Bitcoin prices to move in the other direction.

Governance Stability and Forks

Since a central authority does not rule Bitcoin, it relies on developers and miners to transact and maintain the secure blockchain. As a result, software changes are consensual and tend to frustrate the Bitcoin community since it takes a long time to resolve fundamental problems.

A particular point of pain was the issue of scalability. The number of transactions that can be processed depends on the size of the blocks, and currently, Bitcoin software can process only about three transactions per second. Although this was not a concern when the demand for cryptocurrencies was low, many were concerned that slow transaction speeds would lead investors to competitive cryptocurrencies.

The community has the best way of increasing the number of transactions. Changes to software usage rules are called “forks.” “forks.” ‘Soft forks’ are changes in rules that do not lead to new crypto-currency changes, while the changes in ‘hard fork’ software lead to new crypto-currencies. Bitcoin cash and Bitcoin gold were included in previous hard forks.

What Gives Bitcoin Rates FAQs

How Can You Calculate Bitcoin Value?

The value of Bitcoin depends mainly on its supply and the demand for it on the market. Its value also depends on other factors, including the availability and rewards for mining alternative digital currencies, supplies, and prices. Intrinsic value can also be estimated based on the block reward, electricity cost, energy efficiency of mining hardware, and my difficulty in calculating the average marginal cost of production of a bitcoin at any time.

How Does Bitcoin Grow in Price?

Bitcoin is approaching its maximum limit, which increases demand for it. Growing demand and limited supply are pushing up prices per bitcoin. In addition, more institutions are investing in and accepting Bitcoin as a form of payment, increasing its utility and making it a preferred medium of consumer exchange.

The cryptography, robust protocols, and availability of several interchanges ensure that Bitcoin is relatively secure. You don’t have to buy a whole Bitcoin to own it. There are fractional shares available, which increase their appeal and value.

How Bitcoin Generates Money?

Contrary to stock, Bitcoin is not owned by a company or entity. Instead, Bitcoin owns digital and paper currencies, much like $1. Bitcoin mining providers earn rewards for completing blocks of verified transactions, and Bitcoin owners earn money with increasing prices per coin. For example, if you bought 100 coins for 65.52 dollars on July 5th, 2013 (100 x $ 65.52= 6.552 dollars) (Bitcoin’s record low), you would have 6.168.386.5 dollars until the all-time high at 61.683.86 dollars on March 13th, 2021.

Why is Bitcoin Important?

Demand for Bitcoin is growing while new supplies are decreasing, with each block being reduced by half every four years, and the last block of Bitcoin was mined in about 2140. Unlike most other products, the supply rate of the new bitcoins cannot increase in response to demand hikes.

Unbalance of supply and demand leads to higher prices. For this and the potential ability to prevent inflation, confident consumers, companies, and investors prefer Bitcoin. This leads to increasing popularity and, hence, a price increase.

What Makes Bitcoin Rates Increase and Decrease?

For different reasons, including media coverage, speculation, and accessibility, bitcoin’s prices fluctuate. Some Bitcoin proprietors panic in the face of negative press, sell their shares, and lower the price. A positive press versus. Vice versa. In addition, the price decreases when the volume of bitcoin sold on the market rises. Finally, the fact that more institutions take Bitcoin into their investment and exchange medium increases their prices.

In addition, many people have eroded trust in their fiat currency and are looking for alternative sources of money. Due to the decentralization and upregulation of bitcoin, the alternative is favorable, thereby increasing its prices.

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Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on: igor@forex.in.rs

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