Bitcoin is a digital or virtual currency that operates through a decentralized “blockchain” network, which comprises a public record of transactions. The bitcoin price is subject to daily changes and is therefore highly volatile in nature. The factors that affect the bitcoin price and its volatility are discussed in the following subsection.
Factors Affecting the Price of Bitcoin
Supply and Demand
Although affected by the two primary economic variables of supply and demand, the mechanics governing bitcoin are different. Firstly, online trading in bitcoin is not the same as trading corporate stocks or bonds, and secondly, bitcoin trading also differs from traditional currencies that are backed by central bank or government. The bitcoin supply is affected by the bitcoin protocol, which determines the fixed rate at which new bitcoins get created. Secondly, the number of bitcoins that the system allows to exist, which is capped at 21 million.
The “network” effect arises where the value of a product or service is determined by its number of users. These network effects are both positive and negative. The former arises when the value of a product, service or platform increases with the number of users. The number of users, the adoption and the acceptability of bitcoin are affected by user-generated content (UGC) on online chat forums and social media platforms, such as Facebook and Twitter. The reason is that the information shared through posts, comments, and reviews affect a product’s popularity.
Although being the first cryptocurrency to be introduced has given bitcoin considerable popularity and is currently the biggest cryptocurrency, it is important to be noted that bitcoin price is affected by its adoption and utility. There are many cryptocurrencies available today that make use of the blockchain technology, which has led to a considerable effect on bitcoin’s popularity.
Regulatory and Legal Matters
In absence of any regulatory and legal concerns, bitcoin is accessible and can be traded among those who know about it and those who can afford to purchase actual bitcoins. In this light, online trading in bitcoin can be regarded as being a close-knit community of traders or a closed virtual economy. Regulatory and legal matters affect the price of bitcoin as it opens access to the wider public, leading to greater transparency and a reduction in price volatility.
In light of new cryptocurrencies, the price of bitcoin is currently at a low point due to scalability and transfer time issues. But it is possible for rectifying these issues, via new solutions such as Segwit, Lightening network, and Blockstream.
However, the price of bitcoin is very likely to move upwards to its high point in the coming years as it has numerous functions. The important ones that determine its price and utility are:
- It is a digital currency, meaning that individuals can make and receive payments in the form of bitcoins. In this sense, it is similar to making and receiving payments in currencies, such as the USD or INR.
- It is also regarded to have a storage value. In this sense, a bitcoin can be stored as wealth or like a commodity, such as gold.
- It has a fixed exchange rate, in that it operates as a market instrument and commodity
Impact of change in bitcoin price on other cryptocurrencies
Given that cryptocurrencies are valued according to the network effects, a change in price is likely to have a considerable impact on its adoption and utility. In addition, it should be noted that each of these cryptocurrencies operates like platforms. For instance, “bitcoin” serves the purpose of peer-to-peer electronic payments transfer gateway, “ethereum” serves the purpose of constructing smart contracts. In this way, the utility of the cryptocurrency affects its price.