If you’re interested in cryptocurrencies, especially when it comes to investment opportunities, then understanding how they are valued is crucial. Even when you use great automated trading platforms such as bitcoin up, it’s still a good idea to understand how they work.
How the Price Is Calculated
Traditional currencies as we know them are regulated and controlled by a central bank or a country’s government. However, bitcoin and other cryptocurrencies are very different.
As many of us know, Bitcoin was first established in 2009 by an anonymous creator that went by the name of Satoshi Nakamoto. Bitcoin is a decentralised currency that functions without the control of a higher authority. So, it is fundamentally different to traditional currencies. There are a few different things that impact the price of cryptocurrency.
What Factors Help Determine the Price of Bitcoin
Here are some of the factors that can impact the price of bitcoin:
- Developments that are published by the media
- Internal governance factors
- Country’s laws and regulations for its function and sale
- Other cryptocurrencies that are competitors
- The amount provided to Bitcoin miners when mining it
- How expensive it is to mine the currency
- Supply and demand!
Looking at Its Supply
The supply aspect of any asset plays a huge part in how it’s priced. If the supply is low, then it’s likely the price will increase significantly as everyone wants a slice of the action. However, if the supply is large then it can be easily acquired so the price will be lower.
Bitcoin’s supply is different from many other assets. This is because it only has a limited amount that is getting smaller and smaller with every passing day. It’s estimated that there are around 18 million already in circulation, but only 21 million will ever be available. It’s designed to release a fixed number of new bitcoins every so often with each year being less than the time before.
For example, in 2016 the supply was 6.9% which went down to 4.4% once 2017 hit. Furthermore, there is also an event called ‘bitcoin halving’ that happens every 4 years. The reward for mining Bitcoin transactions halves, so less Bitcoins enter circulation. When this happens it typically increases the price of Bitcoin significantly.
Looking at Demand
Demand is a little harder to determine when figuring out how it’s going to impact Bitcoin’s price. The major features that play into demand consist of economic considerations, along with geopolitical ones.
A good example of this is Venezuela. Demand for cryptocurrencies, in particular Bitcoin, is extremely high as their country’s traditional currency battles hyperinflation. In addition, there has been a lot of media coverage of crypto in the last couple of years which has been great publicity making the demand higher.
So, with many individuals dependent on Bitcoin along with it being the biggest cryptocurrency to date, there is ongoing demand. This combined with the fact the supply is shrinking every year provides a promising forecast of its price for the future.
Other Cryptos Competing for Investment
Although everyone can agree that Bitcoin is the frontrunner when it comes to crypto, there are many other types that are fighting for investment. Things have changed drastically in the last couple of years with bitcoin owning 80% of the market share in 2017, however, if we jump to 2021, it only made up to 50% of the market.
Therefore, current and future alternatives will have a considerable impact on the price of Bitcoin and should be closely monitored.
