What Determines the Price of Bitcoin?
Unless you’ve been living in a monastery high in the mountains of Tibet for the last few years, chances are you’ve heard some of the buzz surrounding Bitcoin. This cryptocurrency has taken the world by storm, with thousands of Bitcoin miners working to mint more currency and earn rewards. Everyone from Visa to Overstock.com has started accepting Bitcoin as payment, and you can even buy Bitcoin at ATMs these days.
If you google the value of Bitcoin, you’ll find a different answer every hour of the day. So what causes this price to fluctuate so much? Read on and check out the video below to learn about all the other things that can change the price of Bitcoin.
What Is Bitcoin?
Before we dive into all the things that can impact Bitcoin prices, let’s talk some about what it is. First, Bitcoin is a currency not controlled or backed by any government or financial institution. Instead, users in massive blockchain systems manage cryptocurrencies. We’ll discuss more in a moment.
Bitcoin was the first significant cryptocurrency to hit the market, and in recent years, it’s exploded in value. While the base currency is one Bitcoin, there are also smaller divisions you can trade in. For example, millibitcoins are a thousandth of a Bitcoin. Microbitcoins are a millionth of a Bitcoin. And then there are satoshis, which are equal to one hundred millionth of a Bitcoin.
How Does It Work?
So if any government or official financial institution doesn’t back cryptocurrencies, how does it work? Bitcoin effectively crowdsources its regulation, operating through massive blockchain logs accessible to the public. These blockchain logs contain records of every single transaction that happens with Bitcoin currency.
Because this blockchain is public, Bitcoin users can police the cryptocurrency’s transactions and make sure no one commits fraud. Unlike fiat currencies (standard national currencies like the dollar or pound), Bitcoin is not tied to your actual identity. But it is connected to a virtual identity that can be used to enforce Bitcoin rules.
Why Does It Have Value?
Backed by an assuring a government that value exists, fiat currencies, like the Euro or the dollar, can be traded for goods and services. But Bitcoin carries no such guarantee; it exists entirely in the digital world and doesn’t have ties to any established organization. So why does it have value as a legitimate currency?
The short answer is that it has value for the same reason all currency has value: we all agree that it does. A dollar bill has no inherent value, but because we’ve all agreed that a McDonald’s sweet tea is worth $1, you can trade that bill for a cold drink. There is also a limited supply of Bitcoin (21 million Bitcoins, to be exact), inherently giving Bitcoin value.
Supply and Demand
As with any market, one of the most significant factors that impact the price of Bitcoin is supply and demand. While it is true that a new Bitcoin is constantly mined (more on that in a moment), the coin’s growth rate can go up or down. Because all of the Bitcoin in existence is currently held, if new Bitcoin isn’t mined fast enough, there may not be enough supply to go around.
Market demand is the other part of the value equation. That can change with something as simple as a social media trending topic. You may remember a few years ago when people began talking about Bitcoin as an exciting new trend. At this time, because so many people wanted to jump on the Bitcoin bandwagon, the cryptocurrency’s value skyrocketed.
Bitcoin Mining Costs
Bitcoin mining is the process by which new Bitcoin is “minted.” This process is complex and involves miners solving extremely complicated math problems using high-powered computers. The first person to reach the correct solution for that particular block gets rewarded with Bitcoin. After that, the new currency gets added to the blockchain.
However, Bitcoin mining isn’t cheap; it requires highly specialized computer equipment and an astounding amount of electricity. The amount of money miners have to invest before getting Bitcoin determines its worth, as well. The more it costs to mine Bitcoin, the less value the mined block will have.
Bitcoin Mining Rewards
Naturally, Bitcoin mining rewards are the other side of the coin when it comes to the value of the cryptocurrency. Bitcoin production costs may go up, but as long as the corresponding rewards go up, too, the currency keeps its value. The key is for mining rewards to never fall behind the cost to produce them.
Let’s say, for instance, that you have to invest $5,000 in computer equipment and electricity to mine one Bitcoin block. If the Bitcoin you get back for that effort is worth $10,000, your mining investment will have paid off. But if you know you’ll only get $2,000 worth of Bitcoin, you’ll skip the whole endeavor, and the currency will stagnate.
Bitcoin Mining Rules
You may not be surprised to learn that there are precise rules in place governing the rewards given to Bitcoin miners. As more and more of the currency is mined, each piece is less valuable (see the supply and demand section). So, over time, the reward for mining Bitcoin inevitably goes down, preventing over mining.
Bitcoin rules dictate that every time another 210,000 blocks of Bitcoin get mined, the reward for solving a block gets cut in half. Halving happens about every four years, with the last halving occurring in July 2016. In 2021, we’re overdue for a new halving, and we may see one come later this year.
Competing Cryptocurrencies
Like in other markets, Bitcoin value also depends mainly on how other competing cryptocurrencies are performing. Right now, Teslas are worth a tremendous amount of money because they’re the only self-driving cars available on the market. As other self-driving cars become available, the demand for these particular cars will drop, and the price will decrease.
While Bitcoin was the first significant cryptocurrency, it wasn’t lonely for long. Since its creation, dozens of others have jumped on the digital currency trend. When these currencies are performing well, the value of Bitcoin may drop somewhat because consumers have multiple options for cryptocurrency investment. But if competing cryptocurrencies are struggling, Bitcoin may become the only game in town again and will rise in value.
Bitcoin Sale Regulations
It should be no surprise that just as there are rules governing Bitcoin production, laws govern how it’s sold and traded. Although Bitcoin operates outside of the fiat currency system, it can be significantly influenced by such. Just as activity in another country can cause the dollar’s value to rise and fall, investors working on the fiat exchanges may impact the value of Bitcoin as well.
There has been much debate about regulating Bitcoin – is its security, a commodity, or an underlying asset? What it gets classified as determines how investors interact with it and how much demand there is. For instance, fiat investors may bet on Bitcoin futures in specific ways, impacting the cryptocurrency’s price, depending on how it’s classified.
Internal Governance
External regulations aren’t the only rules impacting how much Bitcoin is worth. For example, we mentioned earlier that Bitcoin is a self-governing system managed through an extensive blockchain database. As a result, any new decisions about the cryptocurrency have to be made by the consensus of the entire user base, which can take a long time.
One of the internal governance issues most impacting Bitcoin value right now is the question of scalability. There is much debate among users as to whether that speed should increase. Skeptics wonder how that would affect the price of Bitcoin. Thanks to a recent Taproot update, things are looking up in the scalability department.
Fiat Currency Inflation
It should come as no surprise that fiat currency inflation has a significant impact on the value of Bitcoin. However, one of the most important advantages of Bitcoin is that it’s immune to inflation. Because BTC operates outside of the fiat system, there will only ever be 21 million Bitcoins. It is very different from traditional fiat currency. As a result, Bitcoin will not lose value in the same way other currencies do.
Most people view Bitcoin value in terms of other fiat currencies. For example, if you search “Bitcoin value” as of this writing, you’ll find that it’s worth about $56,000 United States dollars right now. As the value of the dollar fluctuates, so will the value of Bitcoin.
Trading Exchanges
Of course, a currency doesn’t do you any good if you don’t have any place to get your hands on it. Imagine that Old Navy announced it would be launching a new line of blue jeans, but they wouldn’t be available for purchase in any of their stores or online. Those blue jeans wouldn’t be worth anything because no one could buy them even if they wanted to.
The availability of Bitcoin through trading exchanges has played a massive role in the cryptocurrency’s value. The more exchanges that work with Bitcoin, the easier it is for people to get and the more it’s worth. Luckily for Bitcoin investors, the cryptocurrency’s meteoric rise in popularity has prompted many major trading exchanges to add Bitcoin to their operations.
Institutional Adoption
Institutional adoption is another considerable part of the Bitcoin value calculation. A currency doesn’t do you good if you can’t spend it anywhere, and a cryptocurrency like Bitcoin has to rely on vendors agreeing that it has value. You couldn’t write “This piece of paper is worth $2,000” on a sheet of copy paper and expect to be able to buy a new computer with it.
Once more, this factor is currently working in Bitcoin investors’ favor. Cryptocurrency has become very popular in recent years. As a result, more and more vendors are motivated to start accepting it. Recently, Visa, PayPal, Overstock.com, and Tesla began to accept Bitcoin as a viable currency in their markets.
Improving Infrastructure
The final pillar of the Bitcoin accessibility triad is the infrastructure it takes to support it. First, of course, you have to acquire and spend Bitcoin, but you also need accessible ways to manage your Bitcoin. For example, Fiat currencies have banks, ATMs, check cashing services, loans, and many other options for moving around and managing your money.
As Bitcoin becomes more and more well established, its infrastructure improves. There are now hundreds of Bitcoin ATMs across the country that allow you to purchase Bitcoin or trade it in for fiat cash. In addition, as Bitcoin becomes easier to manage in daily life, its value will increase.
Discover the Current Price of Bitcoin
Bitcoin is one of the most exciting currencies, crypto or otherwise, on the market today. While it doesn’t operate by traditional currency rules, many of the same factors can impact Bitcoin’s value. From supply and demand to inflation and market regulations, several things can influence the price of Bitcoin.
If you’d like to discover the world of Bitcoin trading for yourself, check out the rest of our site at Byte Federal. We have dozens of Bitcoin ATMs spread across the country to make it easy for you to manage your Bitcoin. So find a location near you today and start investing in the world’s leading cryptocurrency.
