4/18/2024

How is the price of Bitcoin determined

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Very soon the Bitcoin halving is due to take place, which is carried out every 4 years. Analysts are divided on how significantly this event could affect the price of the asset.

On the eve of the Bitcoin halving 2024, we consider the main factors determining price dynamics. Studying the complex of factors influencing the cryptocurrency rate is key to making informed trading decisions.

What determines the price of Bitcoin?

Unlike traditional currencies, the issuance of Bitcoin is not controlled by a centralized authority, be it a central bank or government. This explains the inapplicability of standard monetary policy instruments to Bitcoin, and also excludes the influence of factors such as inflation or economic growth indicators on its value.

Instead, Bitcoin functions more like a commodity, used to store value.

Consequently, its price is influenced by the following factors:

  • Ratio of Bitcoin supply to market demand;
  • Mining cost;
  • Competition from other cryptocurrencies;
  • Regulation: government decisions and regulations;
  • Media coverage and news.

The impact of supply on the price of the first cryptocurrency

A significant role in the pricing of any asset is played by its supply. In the case of Bitcoin, its supply is limited and strictly regulated. The protocol of the first cryptocurrency provides for the release of 21 million coins, which undergo halving every 4 years, while the fixed annual mining is gradually reduced. This, in turn, leads to an increase in demand for it, just as the price of corn would increase if its harvest were reduced every four years, and this information was publicly available.

Bitcoin price and demand

The growing popularity of Bitcoin in the media has led to more people learning about it, which has stimulated interest in purchasing it. Influential individuals positioning themselves as investment experts and business owners touted the potential and future value of Bitcoin, fueling interest in it.

But more importantly, in countries experiencing high inflation and currency devaluation, such as Venezuela, Bitcoin has come to be seen as an alternative store of value and a way to protect assets.

However, it is important to note that the price of Bitcoin is still subject to significant volatility, characterized by alternating periods of sharp rises and falls. An example is the sharp rise in Bitcoin prices in 2017, followed by a long period of decline, and then two periods of rapid growth and decline until 2021.

Competition factor in the market

Although Bitcoin remains the most famous cryptocurrency, hundreds of other tokens are vying for investors’ attention. In 2017, Bitcoin accounted for more than 80% of the total market capitalization of the cryptocurrency market. By 2023, this figure has decreased to less than 50%.

The main reason for the decline in Bitcoin’s dominance was the increased awareness of investors about altcoins and their potential. One of the strongest competitors of Bitcoin has become Ethereum (ETH). Its rise in popularity has been driven by the boom in decentralized finance (DeFi). Today, Ethereum’s share of the cryptocurrency market is about 20%.

In addition to Ethereum, other cryptocurrencies such as Tether, BNB, USDCoin and Solana have also gained popularity. These altcoins are also gaining market share from Bitcoin.

Bitcoin and regulation

Bitcoin’s lack of regulation has both pros and cons. On the one hand, this provides freedom of transactions, not limited by state borders and bureaucratic procedures. On the other hand, the unregulated status of cryptocurrency raises concerns among governments and financial regulators, who see in it potential risks associated with money laundering and price volatility.

The issue of regulation of cryptocurrencies remains one of the key ones in this area. It is expected that an appropriate regulatory framework will be developed over time. The most striking example of the impact of regulation is the approval by the US Securities and Exchange Commission of a Bitcoin ETF in early 2024.

The impact of bans on cryptocurrency trading and mining introduced in some countries cannot be ignored. The example of China, where a mining ban in September 2021 led to the migration of mining farms to other countries, demonstrates how restrictive measures can affect supply and demand, thereby fluctuating cryptocurrency prices.

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