Bitcoin is a digital asset developed in 2009 by Satoshi Nakamoto, whose identity remains anonymous to this day. Unlike fiat money, Bitcoin isn’t issued by a legal body – instead, a dispersed network of cryptographic protocols is used to create and store BTC. Investors carry out transactions directly, as no mediator is involved, eliminating trade restrictions and streamlining commerce. But Bitcoin also appeals to businesses that are increasingly accepting this cryptocurrency in their operations, giving it significant market value. And yet, this asset is volatile, and it’s essential to learn what factors impact btc price in order to make more informed decisions regarding your investments.
Supply and demand
If you have a background in economics, you likely know how the law of supply and demand works. But let us explain this concept to those who aren’t familiar with it. According to this law, supply and demand are the two market forces that determine a particular commodity’s price and quantity. For example, if the demand for a specific good declines, its price boosts, leading to increased production, or vice versa. This principle also applies to cryptocurrencies that gain value when the demand exceeds the supply. Cryptocurrencies have different monetary policies; for instance, Bitcoin supply is enhanced by a fixed amount whenever a new block is mined on the blockchain.
On the other hand, besides providing a fixed reward for every mined block, Ethereum also pays out for adding uncle blocks (blocks that aren’t considered as part of the main chain) in the new block. Therefore, in this case, there is no fixed supply increase. For other cryptocurrencies, the team behind the project is the one that dictates the supply and can choose to give the public more of a token or burn it to manage the cash supply. Demand can enhance as the utility of a project increases. Moreover, the increased adoption of crypto as an investment option also increases demand while reducing the circulating supply. For instance, the price of Bitcoin peaked in early 2021 when institutional investors turned their attention to the asset and started buying and holding it. At that time, the demand exceeded the pace at which new coins were developed, reducing the available supply of Bitcoin.
While Bitcoin is the leading cryptocurrency in the market, many other tokens exist and are launched daily. Increased awareness of an alternative coin can send down the price of Bitcoin by gaining momentum through its practical applications and capabilities. For instance, Ethereum gained increased interest from investors, standing next to Bitcoin as the preferred asset, and this has a lot to do with the boom in DeFi.
Other cryptocurrencies have also surged in popularity, including BNB and Solana. But even if they took away some investment dollars from Bitcoin, these new digital assets have also made it more popular among investors, thus increasing the awareness and demand for cryptocurrencies.
Cost of production
Cryptocurrency tokens are produced through mining, a process in which a computer verifies the next block on the blockchain network. The mining process enables cryptocurrencies to work efficiently, and because it requires computing power, participants must invest in costly equipment to mine cryptocurrency. Bitcoin uses a PoW system, and the competition to mine is enormous, making it difficult to carry out the process, as miners go up against each other to verify a block by solving a complex math problem.
As a result, the mining cost increases because more powerful equipment is required to succeed with the process. And as the cost rises, an increased value of the cryptocurrency is needed. The value of the digital asset they mine must offset their costs – otherwise, they won’t mine it. Given that the blockchain can’t function without miners, if there’s demand for the blockchain, the price of a cryptocurrency will have to rise.
Bitcoin was launched after a financial crisis accelerated by the loosening of regulations in the market of derivatives. This crypto is still unregulated, and while this status equally provides benefits and drawbacks, regulation is needed so that cryptocurrency can be traded more easily.
For example, exchange-traded funds ( ETFs) make digital assets more accessible to investors, increasing their value.
Furthermore, if cryptocurrencies were regulated, investors could take short positions, which means borrowing shares and selling them to someone else. This would result in better price discovery while decreasing the volatility of crypto pricing.
Popular cryptocurrencies like Ether and Bitcoin trade on several exchanges. In fact, you can find the most popular tokens on nearly any crypto exchange. However, smaller tokens may only be listed on specific exchanges, meaning that not all investors can access them. Moreover, some platforms will aggregate quotes for swapping cryptocurrencies across different exchanges, requiring a fee and increasing the investing costs. And if a digital asset is traded sparsely on a small exchange, some investors may consider the spread of the exchange way too big for them.
On the other hand, if a specific crypto is listed on several exchanges, it can result in more investors wanting to buy it and being able to do so, ultimately increasing demand. Therefore, the price of the cryptocurrency goes up.
Finding value in Bitcoin despite its volatility
If you understand how supply and demand work and the other factors that impact the price of Bitcoin, you will be able to make better decisions regarding your investments. Bitcoin can be volatile and risky, so you shouldn’t invest without developing a plan first. However, this cryptocurrency has value just like paper cash, as it is handy for those looking for a seamless way to carry out transactions. Bitcoin provides transparency, fungibility, durability, accessibility, and scarcity, all of which make it valuable. But ultimately, it all comes down to trust, as many believe in the potential of Bitcoin to solve the issues of the traditional financial system.
If you want to start buying Bitcoin in 2023, consider consulting an investment professional and talking to them about your current financial situation and goals. They will help you understand the risks involved and develop strategies tailored to your specific needs.