What factors determine the price of Bitcoin?

Is Bitcoin’s price fluctuation driving you nuts? Don’t understand what on earth determines prices and are therefore scared to invest? Either way, you’ve come to the right place. Here’s where we do all the breaking down for you, so you don’t have to. By the end of this article, you will not only understand the factors that give Bitcoin value and what makes it go up and down, but you’ll also be able to explain them to me like I’m five.

Below are some of the major factors that determine why Bitcoin’s price rises and falls at various points in time.

1. The blockchain protocol

The value of a cryptocurrency like Bitcoin is determined very differently from the equity market. A company’s financial strength, for instance, determines the performance of equity stocks in the market. But how a crypto fares depends to a large extent on the underlying blockchain protocol.

Blockchain protocols are a set of rules that govern data sharing between different computer systems. They define how users send and receive information on the network. Every crypto project has its own blockchain protocol, and each protocol has its own consensus mechanism, which makes it unique. You can learn more about them by clicking here.

The stronger a blockchain protocol is, the more resilient its value is in the market. The strength of any protocol is determined by its level of decentralization, the number of dApps deployed on the platform, developer activity on the platform, and so on.

Bitcoin, the oldest and a time-tested blockchain network, has not only survived multiple bear market cycles, but the network has also emerged stronger each time. This has everything to do with the protocol. Bitcoin’s protocol makes it secure, tamper-proof, and the most decentralized blockchain network—essentially a pretty strong network. That plays a key role in Bitcoin, one of the most enduring cryptos, price-wise.

While the protocol does play a huge role in determining the value of a particular crypto, it isn’t everything there is to it. There are various other factors at play, some of which we will discuss below.

2. Supply

The supply plays a crucial role in determining the value of any crypto. In the case of Bitcoin, it has a fixed supply of 21 million coins. To ensure that the price stays up, the supply of new coins in the market is slowed down at fixed intervals. In other words, it has disinflationary tokenomics.

In a little over one decade of its existence, over 19.2 million BTC have been mined, but less than 1.8 million coins will be mined over the next 120 years. The last coin will be mined sometime around the year 2140.

The cost of producing BTC, too, is a key factor in controlling the supply. The cost depends on mining infrastructure costs and electricity expenses, both of which vary according to the mining difficulty. The higher the difficulty level, the more computational power is required for mining and the higher the electricity expenses.

To ensure that fewer coins are mined, the incentives offered for mining also keep reducing with time. The mining reward for Bitcoin right now is 6.25 BTC. This will be halved to 3.125 BTC in 2024. This halving of mining incentives can cause a spike in BTC’s price. After the 2020 bitcoin halving event, for instance, BTC broke above its previous high of $19,783 and touched $68,789.

The efficiency of this system becomes apparent when you compare Bitcoin’s price movements to that of memecoin DOGE. With an unlimited supply, Dogecoin fails to get its price token price to rise despite the huge popularity and demand in the market.

3. Market demand

The price of all cryptos is affected by market demand, and Bitcoin is no different. As Bitcoin is the most successful crypto, it is referred to as gold in the crypto market. This indicates the higher demand it enjoys among all classes of investors. As the demand for Bitcoin in the market grows, its price will rise and vice versa. Combined with limited supply, the high demand plays a key role in making Bitcoin a scarce asset. This scarcity results in price growth.

4. The media and competitors

The news greatly impacts the prices of cryptos like Bitcoin. If there is widespread fear in the market due to news about any negative event or changed market conditions, crypto prices tend to fall. On the contrary, if there’s good news, investors feel bullish, and prices tend to rise sharply. News often determines whether investors are feeling fearful or bullish.

The impact of news is especially evident when it concerns competition. For instance, the successful Ethereum Merge caused some price fluctuation on the Bitcoin front as well. As Bitcoin’s competitors get strong through such upgrades, BTC prices could eventually take a hit. The arrival of newer altcoins, too, could eat into Bitcoin’s market. More so if they have been hyped in the media.

5. Rules and Regulations

Rules and regulations greatly impact the price of cryptos, including Bitcoin.

For instance, a ban on the trading, holding, and minting of cryptocurrency by any major economy greatly impacts the price of cryptocurrencies. When the Reserve Bank of India banned the use of banking channels by crypto exchanges in India in 2018, it resulted in a sharp correction in the price of crypto. Soon after the ban, BTC’s selling volume surged 1.5 times in a single day, and prices went down by 10%.

Similarly, China’s ban on BTC trading and transaction ban in 2021 caused prices to crash from $51,000 at the beginning of September to about $41,000 at the end of the month. The supply crunch was the result of mining farms in China being forced to pack up and move.

On the other hand, favorable regulations that can spur the widespread adoption of crypto assets result in the price of cryptos appreciating.

In the end, supply, demand, news, competition, and regulatory developments all influence investor sentiments. Investor sentiment is ultimately one of the most significant factors that define the course of any crypto’s price movements.

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