What determines the price of bitcoin
The Bitcoin exchange rate is highly volatile. This opens up broad prospects for earning and at the same time raises many questions about the reasons for such a sharp drop in price. As you know, bitcoin is a decentralized means of payment, which neither the creator nor the government has any influence on, so it’s problematic to immediately understand what the cryptocurrency exchange rate depends on and it will be necessary to understand in detail the factors affecting its value.
Cryptocurrencies appeared not so long ago and differ significantly from all other assets. They are not expressed in any way in the material world, are not controlled by the state and are not tied to other assets. Therefore, for most, the reasons for the change in their course are not clear.
Bitcoin exchange rate is determined by market demand and market offers. This is the so-called natural adjustment of the value of a cryptocurrency asset, which brings the bitcoin rate to the real price at which users are willing to buy it, based on the conditions of the market change.
Also, each holder of a coin can have a certain influence on its value by selling and acquiring new coins, thereby shaping market trends. However, large coin holders, the so-called “whales,” have a more significant impact on the cost. They have the ability to manipulate the market and cause artificial changes in value.
Most often, it is customary to blame the Chinese for the occurrence of sharp changes in value, because according to statistics, most of the coins are mined and concentrated in China. Large holders can change the value of buying or selling cryptocurrency. Due to the active sale of coins, their value will certainly fall and vice versa, with a high demand and lack of presence on the market, the rate increases. Such a change in the rate is considered artificial and is made with the aim of profit on gullible traders. Large players at first massively buy coins, causing artificial excitement and making a pump of value, and then at the peak of value they sell them, making a so-called dump.
Factors Affecting Bitcoin Cost
Global jumps in the rate of top cryptocurrencies occur regularly and depend mainly on news feeds and the willingness of users to buy cryptocurrencies. If traders appear on the market who are ready to buy coins at the peak of popularity, then the value of a digital coin will constantly grow. In addition to the hype and demand, the course is also formed on the basis of several factors.
First of all, the features of its functioning affect the course of bitcoin:
- Bitcoin emission is limited to 21 million coins. Bitcoin is not in vain compared with gold, since its reserves are also limited and this is a natural factor affecting the value rate and the increasing excitement around it.
- Decentralization. Bitcoin growth provokes mistrust of fiat currencies, the value of which is determined by the conditions of the global economy. Bitcoin, which exists outside government, calls attention to users as a valuable asset for saving capital from inflation.
Rules for issuing coins. Every four years, the issue of coins is reduced by half. Thus, less and less coins go into free circulation, which allows you to control the level of supply and demand in the market.
- Increased network complexity. Mining makes cryptocurrencies decentralized. A significant increase in the complexity of the network forces many miners to abandon production due to low profitability and an increase in payback periods. This threatens that most of the capacities will be concentrated in the hands of several large data centers. Thus, bitcoin can become centralized and this fact scares off many investors.
In addition to internal factors, there are also many external factors that also affect the Bitcoin exchange rate and it is they who often cause sharp jumps in the exchange rate.
External factors affecting the Bitcoin exchange rate:
- Information. The topic of bitcoin is often covered in the media and various information resources. Journalists are sometimes biased, but in the wake of popularity, their materials are held in the front pages. The market reacts almost instantly to news reports with a change in course. At the same time, the positive changes highlighted in the media can be a positive impetus for increasing popularity, which is why bitcoin is growing.
- Spread. Since its inception, Bitcoin has come a long way from an unknown payment system to a mass payment tool. Now you can buy goods for it in a variety of marketplaces, and in some countries it is accepted for payment in offline stores. The greater distribution and demand it has, the more attention it attracts and, accordingly, the higher its value rises.
- Legislation. Each state has its own attitude to bitcoin and cryptocurrencies, but most countries do not yet regulate it at the legislative level. To date, many countries have recognized the potential of Bitcoin, changing the negative attitude towards it. At that moment when the United States recognized Bitcoin as a commodity, its value increased sharply.
- Pampers. As mentioned above, large players can have a significant impact on the market, thereby creating sharp fluctuations in the exchange rate. Having enough assets, large players begin to buy coins en masse, creating artificial excitement. Beginners or “hamsters”, as they are commonly called in the vocabulary of traders, noting a tendency to increase demand, pick up a wave of excitement and buy coins at artificially high prices. After that, diapers, waiting for the peak value, sell the purchased coins at a higher rate and as a result, the coin rate drops sharply.
- Dependence on fiat currencies. The change in the rate of bitcoin against the ruble or hryvnia may be caused by an increase in the value of the dollar and the euro. This factor also affects the value of Bitcoin in relation to other state currencies, which is a means of calculation only within the borders of a particular state, in contrast to bitcoin, dollar and euro, which are distributed around the world.
Is it realistic to predict the course of bitcoin
Given the absence of a specific regulatory body and the presence of many factors affecting the value of bitcoin, it can be concluded that it is impossible to predict a further change in value with 100% probability.
In order to approximately predict which way the Bitcoin rate will move, the trader should pay attention to many factors and closely monitor any changes in the market.
First of all, a trader must learn to distinguish between the natural increase in value caused by positive changes and artificial change – an intentional pump and dump, and for this it is necessary to clearly distinguish between what affects the Bitcoin exchange rate and learn to determine when the changes in value are unreasonable.
A natural increase in value is caused by:
- Increase in demand;
- Positive changes in the system;
- Positive statements by politicians and journalists about the future of cryptocurrencies;
- Increase in distribution and popularity.
Natural adjustment of value, as a rule, occurs gradually and is reflected in a stable schedule. The fall in the rate in this case also occurs gradually and is often the result of an increase in value. Coin holders want to take profits and sell assets at an acceptable cost to them. Other reasons for the natural depreciation are:
- The appearance of a negative news background;
- Panic in the crypto community;
- Decreased interest in the asset.
In other cases, we can talk about market manipulations. They can be determined by the unreasonable growth or decrease in value, as well as by sharp changes in the schedule.
The cost of bitcoin is a kind of indicator of the entire cryptocurrency market, so changes in its exchange rate are sensitive to many factors. It is almost impossible to predict a further change for an ordinary trader. The price forecast can only be based on a variety of indirect indicators, such as the color of the news background and a change in trading volume. Thus, you can try to correctly interpret the changes in value and determine whether they are a natural adjustment of the value of the asset, or caused by temporary manipulations of large players.