Bitcoin has gained a lot of media attention in the past few months and one of the first things to know about this cryptocurrency is that it is the world’s largest and most volatile cryptocurrency. Traditional investors have long debated how to value bitcoin considering its high volatility. The Bitcoin Volatility Index also shows how the bitcoin price has moved over different periods.
For a currency that is not monitored by the bank or any governing body, any curious person or smart investor would wonder what moves the price. This article highlights some of the key factors driving the price of bitcoin and could determine its volatility in the coming years.
Supply and Demand
This is one of the main factors affecting the price of bitcoin as more people are gradually becoming more aware of their finances. Millennials are reportedly investing more now than ever before and cryptocurrency is one of the most common investment options today.
However, the higher the demand and lower the supply of crypto, the higher the price will be and vice versa.
The supply of bitcoin is determined by how much bitcoin is produced by miners. The technology has been designed to slow down the rate at which new bitcoins are introduced to the market by a process called Halving. This has a significant impact on the mining industry and may affect the price, especially considering the constant increase in demand.
Cost of Production
In February 2020, researchers predicted the cost of mining 1 BTC to be about $12,000 to $15,000 after the bitcoin reward halving in May. It was however much lesser than that, as it came to an average of $8206.64. Mining bitcoin is costly and requires time. Many miners are trying to solve a complicated cryptographic math problem at the same time and one block of bitcoins can only be found once every ten minutes. This makes it more difficult and a 2017 study shows how the cost of production of cryptocurrency impacts its value.
User Adoption
Bitcoin user adoption has skyrocketed over the past year especially with the COVID-19 impact in 2020. More demands for bitcoin and other cryptocurrencies can drive the prices up but the reverse could be the case if the demand is low. This explains how bitcoin remains the top cryptocurrency among many others, as the demands for it continues to increase, leaving other cryptos with little demands.
There have also been several platforms created to make bitcoin trading easier than ever. More people are beginning to invest in Bitcoin Era and several other exchanges and wallets. Bitcoin has attracted several users, from individuals to governments, business owners, institutional investors, and multinational corporations. This continues to influence the price of bitcoin and the higher the user adoption, the higher the price will be.
The Bottom Line
Unlike traditional currencies, predicting the price and value of cryptocurrencies is nearly impossible. However, based on the data we have so far from the first time bitcoin was introduced, the key factors in this article are major determinants in what moves the price.
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