Determining the Worth of Bitcoin: 5 Factors You Need to Consider
How much is Bitcoin (BTC) worth today? A question that buzzes through our brains when we first wake up in the morning. With its extreme volatility, who knows where Bitcoin’s price can go in the span of a good night’s rest?
In 2009, NewLibertyStandard, an influential forum user, gave Bitcoin its first exchange rate: 1 USD = 1,309.03 BTC. Since then, BTC has hit an all-time high of more than 63,000 USD and sits just above the 36,000 USD mark at the time of writing.
You’re probably thinking: how does BTC have the ability to play jump rope not only with its value but with our hearts as well? Believe us, we’ve thought about it too—and who wouldn’t?
Five factors that can influence the price of Bitcoin
Supply and demand
The Law of Supply and Demand is something we’ve all heard of before in our elementary economics classes. Almost anything of value follows it, and Bitcoin’s value isn’t an exception. If you aren’t familiar with the concept, in a nutshell, the Law of Supply and Demand sells three core beliefs:
- The law of demand – the higher the price, the lower the demand
- The law of supply – the higher the price, sellers will supply more of an economic good
- Where they meet – together, they determine the market price and the volume of a particular good
How does this apply in the world of Bitcoin? There are two key features of Bitcoin that are heavily affected by these concepts:
First, let’s talk about the rate at which a new Bitcoin is created. The current protocol allows Bitcoin to be made at a fixed rate. As we know by now, when miners process blocks of transactions, new Bitcoin is created and introduced to the market. However, many people don’t understand that this process is designed to slow over time (a.k.a the Bitcoin Halving). This can then lead to scenarios in which the demand for BTC rises faster than the supply. In that case, the price can be driven up.
Next is Bitcoin’s supply cap. Satoshi Nakamoto designed Bitcoin to have a cap of 21 million BTC. Once that cap is reached, miners will no longer be rewarded with new BTC for verifying transactions. When that happens, the halving of block rewards every four years may not impact Bitcoin value. Instead, factors such as practicality and usability in daily life will determine what gives Bitcoin value.
Cost of production
Although Bitcoin is strictly a digital asset, it is still a product that needs to be produced. Mainly, BTC’s cost of production is derived from the mining process’s electrical consumption.
Bitcoin mining is a process in which miners solve complex cryptographic math problems and are rewarded with newly-minted BTC. Often, miners will use up a lot of electricity to solve these math problems, which is definitely integrated into Bitcoin’s value.
On average, a single block will take 10 minutes to verify. As more and more miners join, competition increases. As competition increases, solving the math problem becomes more difficult. When that problem becomes more difficult, solving it can cost you more, especially if you’re looking to preserve that 10-minute interval.
Bitcoin is easily the world’s most well-known and recognized cryptocurrency. However, thousands of other cryptocurrencies out there, like Ethereum (ETH) and Dogecoin (DOGE), are trying to fight for our attention.
The crowded space allows for more diversity in a portfolio, making the playing field appealing to investors. However, because of its competition, Bitcoin’s value can stay pretty grounded. It’s safe to say that if Bitcoin were the only cryptocurrency out there, the price could look totally different.
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Regulations on sales
With Bitcoin being a relatively new form of asset, regulators have long-debated on how to classify it. Because of that, it can become difficult for governments to adopt a position on them. They’re constantly changing regulations such as taxation, among other things.
Since Bitcoin is decentralized—meaning it isn’t tied to any specific central governments—the regulations can directly impact Bitcoin value because they apply to investors. Basically, if there’s fear about a particular government statement or decision, it could cause BTC’s price to fall.
To this day, the regulations imposed on BTC will differ vastly depending on how a country views the coin. In most cases, if the regulators have at least a neutral outlook on Bitcoin, KYC (know your customer) and AML (anti-money laundering) rules will be imposed on high-volume traders and investors.
Take India as an example. Not too long ago, there were talks of a ban on private cryptocurrencies like Bitcoin. Since then, the legality of it all has been stuck in a gray area. Now, there are talks about assembling a panel of experts to study the possibility of regulating crypto.
The same thing is happening in Nigeria, with the Central Bank of Nigeria (CBN) issuing a circular in early February prohibiting banks and other financial institutions from facilitating payments for crypto exchanges.
Situations like that can give existential threats to investors, both old and new. When investors are unsure about the regulatory instances, Bitcoin’s value could decrease because of their fear.
In the world we live in, how can the media not play a role in Bitcoin’s price? Many studies elaborate on their relationship, but in simple terms, the theory is that positive media attention is a possible answer to why Bitcoin’s value is going up. In contrast, negative attention can lead to price dips.
In general, the media is believed to give more people a better understanding of Bitcoin’s basic functionality, leading more people to be attracted to the idea. Let’s say you find an online news article highlighting the advantages of using Bitcoin and you feel absolutely enlightened after reading it. It’s safe to assume that you’ll be talking to your friends and family about it, and in turn, they’ll be doing the same.
It’s the same as stumbling upon that same article and thinking: “Wow, I need to get on this!” Upon reading it, you feel the FOMO (fear of missing out) and buy Bitcoin right away. At the same time, an article that paints a negative picture of Bitcoin can scare you into selling the coins you’re holding.
In today’s age of social media, any kind of crypto news has the potential to affect Bitcoin value..
A stepping stone
Despite these being some of the more significant factors that influence Bitcoin’s current worth, it’s essential to understand that these cryptocurrencies are still maturing, which means they can still change over time. As to where it’s going and what updates are coming, we’ll just have to wait and see.
Maybe we’ll get more answers soon; perhaps we won’t. The best thing we can do is to stay informed. Learn all you can about Bitcoin and maybe you’ll not only minimize risks, but you’ll also know how to react when something happens—and trust us, something’s going to happen. In this game, knowledge is power, so be sure to always keep your thirst for knowledge and never settle.