Bitcoin is the most popular crypto in the world. Created back in 2009, it has since served as inspiration for the appearance of many similar currencies on the market, helping the digital money environment expand and develop. The transactions take place within the blockchain, a decentralized network which doesn’t require the involvement and management of any third-party service.
And while you can perform the same actions in Bitcoin as you would using fiat currency, there are some differences as well. The first lies in the fact that BTC is not issued by a central bank and it’s also not backed by any governmental bodies. Owing to these reasons, Bitcoin prices have a reputation for volatility that has long deterred many prospective investors from giving crypto a try. And while this position is not entirely incorrect, there are also many exaggerations, as well as preconceived ideas.
One of the best ways to be prepared for these variations in price is to be well-aware of what influences the difference in price when it comes to Bitcoin. Here are some of the aspects you should have in mind when laying the foundation of your trading strategy.
One of the main factors influencing the price of Bitcoin is the supply. Since there’s a finite number of Bitcoin available and the final coins are projected to be mined in 2140. The maximum number of coins that can be issued is 21 million, and there are new coins added to the supply every 10 minutes. When Bitcoin was created, its inventor (or inventors) Satoshi Nakamoto designed it to resemble gold in a digital format. Much like the precious metal, Bitcoin was also designed to mimic the finite nature of actual gold.
Due to its finite nature, supply has a high influence on the price variations of BTC. When you check the Bitcoin price chart, you’ll be able to determine the status of Bitcoin at a given moment and as such decide whether it’s an auspicious time for trading or if you should hold out until better tidings roll in. As a general rule, when an asset is scarce the prices are high, and when it’s plentiful the costs lower.
Since Bitcoin is so popular and is one of the most traded crypto, the supply is typically well-publicized. This is yet again because there’s a limited amount of the coin that will be mined, which also translates as a specific amount that is created every year. There’s a fixed rate which dictates the rate at which new coins are created and it will slow down in the future. Every four years production is halved, with the number of coins given as reward for one successful block mining is cut in half.
Due to the diminishing future supply, the demand is skyrocketing. Bitcoin is increasingly becoming a highly sought-after asset for both cryptocurrency traders and those seeking to diversify their portfolios to avoid damages caused by markets entering recession or collapse. Countries facing high inflation rates and devalued currencies have also recorded an increase in their interest in crypto. Political dissidents either in their home countries or self-imposed exile also use it as the governments they oppose can freeze their finances and leave them unable to access any type of funding.
When the demand for Bitcoin increases the price increases proportionally as well. How much traders are willing to pay is also an important factor. As the circulating supply gets closer to the 21 million limit, the prices are going to become higher. The good news is that there are still many years ahead before that happens, so you have plenty of time at your disposal to complete successful transactions.
Bitcoin and crypto in general get a reputation as somewhat nebulous, hard to understand concepts and many struggle to make sense of the fact that they have real value that can be estimated in real life. Therefore, much like other commodities and assets, the price of Bitcoin is also tied to the cost of production.
However, when it comes to BTC, this cost will obviously not be priced based on the price of raw materials and the labor needed to manufacture a physical product. Instead, the production cost is represented by the sum of the fixed costs of the infrastructure and the electrical power required for mining. There are also indirect costs associated with the difficulty level of the algorithm.
In order to complete a block, there’s a lot of brute computational power miners need to put in to solve a hash. This translates into additional costs for the individual miners who must purchase specialized equipment in order to solve the complicated mathematical problems. A normal computer’s chances of solving a hash are slim at best, and that’s only if you already possess a very strong computer. Add to that the additional cooling equipment required and you can be sure that the average Bitcoin miner is looking down at an expense of at least a few tens of thousands.
And, of course, we cannot let out the costly electricity bills. Power is the lifeblood of digital currency production and, according to some estimates, the amount consumed for the network is higher than that of some small countries.
Bitcoin is the most popular cryptocurrency, but many others have followed in its footsteps. Some altcoins have withstood the test of time better than others and have even come to challenge Bitcoins position, albeit unsuccessfully. Nevertheless, competition is also an important aspect deciding how far or low prices are going to fall, even when you dominate your niche like Bitcoin does.
However, the popularity of altcoins has also driven investors to trade in Bitcoin as well, increasing demand, driving scarcity and therefore elevating prices. Competition has brought renewed awareness towards BTC and helped prices and relevance maintain optimal levels.
There are many aspects which influence the price of Bitcoin. If you’re seriously considering becoming a trader, you should make sure you’re well-aware of them. They’re what help you make sound, informed decisions about the best times to buy or sell.