Unlike other monetary systems, Bitcoin is a decentralized, peer-controlled system, which means no third party institution manufactures this cryptocurrency or sets the price, either directly, or indirectly, by modifying/limiting the quantity available on the market.
As a result, bitcoin's price varies proportionally and mainly based on its supply and demand. There are many factors that influence market demand, including global politics, trade wars, and major economic events.
Bitcoin's rules and network
Founded by Satoshi Nakamoto, Bitcoin's maximum number of tokens is 21 million and all transactions made on the network follow a specific and unalterable protocol.
In order to secure the network, Bitcoin miners are responsible for accepting or rejecting these coded transactions. After mining valid blocks, these miners are rewarded in Bitcoin.
A phenomenon called Block Reward Halving, or simply Halving, causes their remuneration to halve every four years (every 210,000 blocks mined). With this phenomenon, the bitcoin price can be increased proportionally to the amount of new tokens available and the rate at which they are created. With each halving, inflation is reduced and the price of Bitcoin rises.
As soon as all network participants agree on the validity of a new block, it is added to the Bitcoin blockchain every 10 minutes.
Bitcoin volatility reasons
Even though Bitcoin has the largest trading volume in the crypto world, it is still small compared to other international markets like gold. Therefore, prices are subject to significant fluctuations, and media coverage alone can cause its price to rise or fall.
Additionally, and as mentioned before, the quantity of Bitcoin decreases over time due to its finite limit of 21 million. To maintain its price stability, Bitcoin's demand must match its inflation rate.
Bitcoin's price can be affected by what factors?
Bitcoin's price can be influenced by several factors, namely:
Supply and demand
In recent years, Bitcoin has attracted a wide range of investors, both retail and institutional, as well as extensive media coverage, resulting in an increase in demand. There have also been a few countries that have made bitcoin legal tender, such as Venezuela, which has a high inflation rate and devalued currency.
As a result of this surge in demand, the cryptocurrency's price has risen due to a limited supply.
As with other commodities, bitcoin's price is strictly based on its marginal cost of production.
There are fixed direct costs and indirect costs associated with Bitcoin production. Expenses related to infrastructure and electricity for mining are included in fixed direct costs. However, the unique indirect costs come from the unique level of difficulty of the mathematical algorithm, which can affect the rate at which Bitcoin is produced, thereby affecting the price of Bitcoin.
As with all currencies, macroeconomics plays an important role in crypto and Bitcoin's price movements. Bitcoin's globalization and decentralized nature makes it subject to several variations related to macroeconomic events in almost every country in the world. Therefore, inflation and interest rates can have a real impact on Bitcoin's price.
Bitcoin has become so popular in recent years that it is now regarded as a new asset class. With Bitcoin, you can transact anonymously without centralized or individual verification. The purpose of this article is to provide a brief analysis of several factors that affect bitcoin's price and its price rise in order to gain a better understanding of bitcoin and its price rise.