Many people have asked who decides the cryptocurrency price, and the answer isn’t as straightforward as you might think.
One of many cryptocurrencies out there, Bitcoin came out in 2009 and was the first-ever crypto on the market. Satoshi Nakamoto is the founder, and there’s no information about “him” at all. In fact, many people believe this name was picked to talk about multiple founders of the cryptocurrency. Though it seems strange that the creator didn’t want to be named, no one has ever come forward to claim that they started Bitcoin.
With Bitcoin, transactions are always recorded in the blockchain. This technology shows the transaction histories for every unit, including other cryptocurrencies than Bitcoin. With it, people can prove ownership of the Bitcoin or crypto coin.
When a person invests in traditional currencies, the funds are issued by the central bank or get backed from the government. However, Bitcoin has no such regulation. This is why many people like it, but it does come with drawbacks.
Buying Bitcoin is much different than investing in a bond or stock, too. You see, Bitcoin isn’t a corporation, so there aren’t any Form 10-Ks or corporate balance sheets to view and consider.
Now, though, you are wondering who decides the cryptocurrency price for Bitcoin and other coins. It’s time to dive deeper while realizing that one person, group, or entity isn’t solely responsible for crypto prices on the market.
What Determines the Price of Bitcoin?
Since Bitcoin isn’t backed by the government or issued by a central bank, it’s not like other, more traditional currencies. Therefore, the economic growth measurements, inflation rates, and monetary policies that often influence the value of traditional currency don’t apply to Bitcoin and other cryptocurrencies.
In a sense, Bitcoin prices are usually influenced by these factors:
- Internal governance
- Regulations that govern its sale
- Exchanges on which it’s traded
- Number of competing cryptocurrency options
- Rewards provided to Bitcoin miners who verify the transactions on the blockchain
- Cost of producing Bitcoins using the mining process
- Supply of Bitcoin
- Market demand for Bitcoin
Let’s take a look at each one separately:
Supply and Demand
Typically, any country without a fixed foreign exchange rate could partially control how much of that currency circulates. It does that by engaging in open-market operations, changing reserve requirements, and adjusting the discount rate. With any of those options, the central bank could impact the currency’s exchange rate.
However, Bitcoin’s supply is impacted in two ways. For one, the Bitcoin protocol ensures that new Bitcoins are created using a fixed rate. Any new Bitcoins get introduced to the market whenever miners process the blocks of transactions. The rate for which new coins are introduced can slow down with time.
For example, in 2016, growth slowed from 6.9 percent to 4.4 percent in 2017 to 4.0 percent in 2018.
This ultimately creates scenarios where the demand for Bitcoin increases much faster than the supply raises, which drives up the Bitcoin (or another crypto) price. When the Bitcoin circulation growth slows down, this is from reducing the block rewards provided to Bitcoin miners. In a sense, it’s like artificial inflation for the entire cryptocurrency ecosystem.
Secondly, the supply could be impacted by how many Bitcoins exist, which is determined by the system. For Bitcoin, the cap is 21 million, and mining activities can no longer be used to create new Bitcoins once that number is reached.
As an example, in December 2020, Bitcoin’s supply reached 18587 million, which represents 88.5 percent of the Bitcoin supply that is ultimately made available. Once all 21 million Bitcoins are circulating, prices primarily depend on whether it’s in demand, legal, and practical (readily available for transactions). This is determined by how popular other cryptocurrencies are.
When all of the Bitcoins are in circulation, the artificial inflation mechanism talked about earlier no longer impacts the cryptocurrency price. As a refresher, this is where the block rewards for miners are halved or lowered. Since miners no longer have a job (creating new Bitcoins), they aren’t required anymore.
However, forecasts show that the current rate of the block rewards adjustment indicates that the last Bitcoin should be mined in 2140 or thereabouts. With that information, you can agree that Bitcoin mining is here to stay for a good long while.
Bitcoin is probably the most recognized cryptocurrency in the world, but there are hundreds of others that want attention, too. Though Bitcoin is the dominant choice for market capitalization, it does have very close altcoin competitors, such as Tether (USDT), Ethereum (ETH), Cardano (ADA), Binance Coin (BNB), and Polkadot (DOT).
With that said, new ICOs (initial coin offerings) are continuously on the horizon because there are very few barriers to entry. Though it’s a crowded field right now, that can be great news for investors since the widespread competition can help to lower prices for Bitcoin right now. Fortunately, Bitcoin has more visibility, which gives it an edge and sets it apart from other competitors.
Even though Bitcoins are virtual, they are still called produced products, so they incur costs to make them. Electricity consumption is the most important factor right now. Bitcoin “mining” relies on a highly complicated cryptographic math problem, and miners all over the world seek to solve it. The first one who does is rewarded with newly minted Bitcoins and the transaction fees that have already accumulated since the last block’s founding.
What’s unique about the production of Bitcoin is that its algorithm only allows a single Bitcoin block to be found about every 10 minutes. This is so unlike other produced goods.
Therefore, when more miners (producers) jump into the competition to solve the math problem, they’re effectively making it much more difficult and more expensive to solve the equation to keep that 10-minute interval.
Currently, research shows that the price of Bitcoin is very closely related to the marginal production cost.
Availability on the Currency Exchange
Just as those equity investors trade stocks on indexes like the FTSE, Nasdaq, and NYSE, crypto investors trade their cryptocurrencies over GDAX, Coinbase, and other crypto exchanges. Such platforms let the investors trade cryptocurrency and currency pairs, such as Bitcoin/USD, which is similar to more traditional currency exchanges.
As an exchange becomes more popular, it’s easier to draw more participants in to create the network effect. Plus, when it capitalizes on the market clout, it can set up rules to determine how cryptocurrencies get added to the exchange. For example, the SAFT (Simple Agreement for Future Tokens) framework focuses on defining how ICOs can comply with the securities regulations. Since Bitcoin’s presence is there on those exchanges, it implies regulatory compliance, regardless of that legal gray area that cryptocurrencies operate in.
Legal Matters and Regulations
There has been a rapid rise in popularity for Bitcoin and other cryptos, which causes regulators to wonder how to classify these digital assets. The SEC (Securities and Exchange Commission) classifies all cryptocurrencies as securities, but the CFTC (US Commodity Futures Trading Commission) thinks Bitcoin is a commodity. With that confusion about with regulator sets the rules, there are plenty of uncertainty surrounding cryptocurrencies, even with the surging market capitalizations.
With that, the market has seen the rollout of various financial products that use cryptocurrency as their underlying assets, such as futures, ETFs (exchange-traded funds), and others.
This impacts prices in two different ways. For one, it provides investors access to Bitcoin, even if they can’t afford to buy the actual coin, which increases demand. With that, it reduces price volatility because institutional investors can use their many resources to bet on Bitcoin’s price, especially when they believe them to be undervalued or overvalued.
Governance and Forks Stability
We all know that Bitcoin isn’t governed by any one central authority and instead relies on miners and developers to keep the blockchain secure and process transactions. Usually, the software changes are driven by consensus, which often frustrates the Bitcoin community because fundamental issues often take longer to resolve.
Scalability issues are also a significant pain point right now. The amount of transactions that are processed depends primarily on the block size, and the Bitcoin software can only process about three transactions a second right now. Though this had been a concern previously because there was little demand for crypto, now, people worry that those slow transaction speeds might push investors to use a competitive cryptocurrency instead of Bitcoin.
On top of all that, the community is divided on how to increase the transaction count. Forks are the rule changes that govern the use of that underlying software. A soft fork contains rule changes that don’t result in a new cryptocurrency creation, but a hard fork software change does result in a new crypto being created. In the past, Bitcoin hard forks included Bitcoin Gold and Bitcoin Cash.
What Makes the Prices Go Up/Down?
Ultimately, Bitcoin prices fluctuate for many reasons, such as availability, speculation, and media coverage. Any negative press can make Bitcoin owners panic and sell, which drives the price down. That also flip-flops with positive press.
When the Bitcoin volume sold on the market rises, the price goes down. However, more institutions are adopting Bitcoin payments, so the price goes up. With that said, most people don’t believe in their fiat currency anymore, so they want additional and alternative sources to help them store their money. Since Bitcoin is primarily decentralized and not regulated, it’s a great alternative, and this drives up its price.
How Bitcoin Increases in Value
As Bitcoin nears its cap, the demand for it increases. With the limited supply and boosted demand, the price for each Bitcoin skyrockets. Plus, it’s increasingly becoming a form of payment from various merchants, so it has more utility and is a preferred exchange medium for consumers.
Because of the robust cryptography protocols used, Bitcoin is quite safe and readily available on various exchanges. Plus, you can buy part of a Bitcoin and still own it. Fractional shares are available, which ultimately increase its value and attractiveness.
Does Bitcoin Make Money? How?
No company can stay in business if it can’t make money. Though Bitcoin is different from companies, it does have to earn its own money. Unlike stock, it doesn’t represent the ownership of an entity or company. If you own a Bitcoin or part of one, you own digital currency. In a sense, it’s like having $1 and owning that $1 paper currency.
Bitcoin miners often earn rewards for completing verified transaction blocks, and Bitcoin owners make money whenever the price of each coin increases.
Why Is Crypto Valuable, Though?
The demand for Bitcoin increases every day, but the new supply availability is shrinking rapidly. On average, the size of each block is reduced by half every four years. With other produced products, the rate of supply increases as people demand more of it, but Bitcoin doesn’t work that way. Once all the coins are in circulation, no new ones can be created. That’s sure to drive prices even more.
When there’s an imbalance between supply and demand, the prices increase. Some investors, companies, and consumers like Bitcoin because of this and its potential ability to hedge any inflation.
It wasn’t always like that, though. When Bitcoin first came on the scene, most people had no idea what to do with it. They were almost afraid of a digital currency. Though there were a handful of investors that jumped in head-first, most people thought it was a fad. When it didn’t disappear, they became interested, which now raises the price even more.
Bitcoin is an investment, and it’s one that many people are making. Though the price can fluctuate many times a day because it’s so volatile, certain instances make it prevalent.
The key takeaways here are:
- When you buy a stock, you get ownership within a company, but if you buy Bitcoin, you own that cryptocurrency.
- Bitcoin prices are mostly affected by availability, market demand for it, supply, and competing cryptocurrencies.
- Since Bitcoin isn’t regulated nor issued by the government, it’s not subjected to governmental monetary policies.
Who decides the cryptocurrency price? In a sense, it is the people investing in it, though other factors are prevalent, too.
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