Bitcoin may be the strangest phenomenon of the 21st century. This cryptocurrency is not supported by gold, any fiat currency, or any other physical assets but its value continues to increase. Some people think that this is completely "tulip fever" hype, but the fact is far more than that. So, what is the value of cryptocurrency? What caused the price of Bitcoin to rise? Does it all depend on people's belief in it? Let us discuss it further.
What determines the price of the Bitcoin?
Here are a few possible factors:
l The positive and negative news about it
l Bitcoin’s supply and demand
l Bitcoin and cryptocurrency regulations in different countries
l The degree of application of Bitcoins in daily life (e-commerce payment, donation, BTC futures, etc.)
l The number of competitive cryptocurrencies
l Exchanges that trade cryptocurrencies
l Professional investors' long and short behavior
l The difficulty of Bitcoin mining
Next, we will analyze in details. Let’s start with the last aspect-the mining difficulty. This factor is often overlooked, but some people say that there is a certain relationship between the difficulty of BTC mining and the rise and fall of Bitcoins, as shown below:
Analysts at DataLight explained that there is a theory that as more miners begin to mine digital currencies, the complexity and hash rate of cryptocurrencies rise as prices rise. However, according to another hypothesis of trader Max Kaiser, who used to buy bitcoin at $3 and has held it till today, the opposite is true. The third argument is that a specific value calculation formula can be obtained by studying the difficulty of cryptocurrency mining and changes in value.
Bitcoin’s supply and demand
The supply of Bitcoin is affected by two factors. First is the supply growth rate set by the Bitcoin blockchain. As the miners package the transaction blocks, new bitcoin will be mined. Over time, the growth rate of bitcoin supply will slow down. Therefore, when the demand for Bitcoin grows faster than the supply, we will see an increase in the price of Bitcoin.
The second supply factor is the maximum number of bitcoins that can be circulated in the system. This number is limited to 21 million. Once this number is reached, miners will no longer be able to mine bitcoin. When the number of Bitcoin reaches 21 million, miners will only be able to obtain transaction fees, and the price of bitcoin will depend on the practicality, legitimacy and demand of this cryptocurrency.
As for the demand of Bitcoins, it depends on 1) the practical application of Bitcoins; 2) the popularity of other cryptocurrencies; 3) the current price and profit opportunities; 4) the availability of the Bitcoin blockchain; 5) the investment transactions and; 6) government regulations, etc.
Bitcoin transactions and liquidity
Bitcoin transactions take place in hundreds of cryptocurrency exchanges around the world. Therefore, Bitcoin does not have a "unique official price"-the price of each exchange is different but arbitrage will keep the price of each exchange at roughly the same level. This trading strategy takes advantage of the spread between trading limits. For example, if Bitcoin is cheaper on BitStamp than on Coinbase, traders can buy cryptocurrencies on the first exchange and then sell them on the second exchange (arbitrage).
Finally, attention should be paid to the impact of major exchanges. These are the sites with the largest trading volume, and their prices are considered more "official". For instance, if the price of Bitcoin changes on large exchanges such as Bitfinex, Binance, and Bitstamp (or all three exchanges at the same time), then the same changes may also occur on other exchanges. This phenomenon can be explained by the fact that most traders pay close attention to the prices of large exchanges. Due to arbitrage and the behavior of other traders, they will expect that the trading prices of smaller exchanges will also change.
This effect is applicable even on exchanges located in completely different parts of the world. For example, if bitcoin becomes cheaper in Japan relative to the Japanese yen, then it is likely that there will be European and American exchanges denominated in Euros and US dollars that will also adjust prices immediately thereafter.
Regulations and taxes
Taxes, laws and regulations are other factors that affects the value of Bitcoins. We have already discussed that each country has its own tax policy for Bitcoin and cryptocurrencies. Therefore, if a country suddenly prohibits Bitcoins, or charges a higher tax on its investment income then the price may drop significantly.
Bitcoin’s internal governance
This is closely related to the value of Bitcoins. Today, Bitcoin is still decentralized and is not controlled by any organization or individual. But in theory, the future of Bitcoin is in the hands of those who owns it.
Another way of saying is that Satoshi Nakamoto gave Gavin Andersen the control of Bitcoin, and then he shared this control with others. There are many rumors and debates about whether certain Bitcoin developers can control the entire Bitcoin system.
Bitcoin usage extension
Bitcoin leverage in our lives is steadily increasing. This is another factor leading to the rise of Bitcoin’s price. Today, in addition to trading and mining, Bitcoin is also used in daily payment (many online stores support bitcoin payment, followed by shopping malls and stores), online micropayments, donations, anonymous payment and other aspects.
Thousands of Bitcoin ATMs have been installed worldwide. The number of companies accepting BTC payments is increasing. Therefore, it can be seen that the usage rate of BTC is gradually increasing.