Skip to content Skip to footer

What does the Bitcoin price depend on: 5 main factors

How much is Bitcoin worth today? We’ve been asking this question every day since the morning, and that’s normal. Who knows how the price of Bitcoin, which is known for its volatility, might have changed overnight? 

In 2009, NewLibertyStandard, an authoritative forum user, set the first exchange rate for Bitcoin (BTC): 1 USD = 1309.03 BTC. As of this writing, Bitcoin is worth about 35,000 USD. 

You may be thinking, “Why is the price of Bitcoin jumping up and down?” We’ve been thinking about that too!

The five factors that determine the price of Bitcoin are

1. Supply and Demand

In economics class, we were told about the law of supply and demand. Everything that has any value obeys this law, and Bitcoin is no exception. If you are not yet familiar with this concept, the main points of the law of supply and demand are as follows:

Law of demand – the higher the price, the lower the demand 

The law of supply – the higher the price, the higher the offer

These two laws together determine the market price and volume of a particular commodity

How does this law work for Bitcoin? It affects two main characteristics of Bitcoin.

First, let’s talk about the speed at which new Bitcoins are created. The existing protocol allows Bitcoins to be created at a certain speed. As we already know, Bitcoins are created and released to the market when miners process blocks of transactions. What many people don’t realize, however, is that over time this process must slow down (a phenomenon also known as halving). This can cause demand for BTC to exceed supply, which in turn causes prices to rise.

It is also worth keeping in mind Bitcoin’s limited supply. Satoshi Nakamoto has limited Bitcoin to 21 million BTC. When that limit is reached, miners will stop receiving BTC rewards for confirming transactions. When that happens, Bitcoin halving, which happens every four years, will no longer affect the BTC price. Instead, Bitcoin’s value will be determined by its practical use capabilities. 

2. Cost of production

Although Bitcoin is only in digital form, it is a commodity that needs to be produced. The cost of producing BTC is determined by the amount of electricity consumed in the mining process. 

Mining is a process in which miners solve complex mathematical problems and are rewarded in Bitcoins. It often consumes a lot of electricity, which affects the price of Bitcoin. 

On average, it takes about ten minutes to check one block. As the number of miners increases, so does the competition. As the competition grows, it becomes more difficult to solve mathematical problems. The more complex the problem, the more expensive it is to solve, especially if you need to meet ten minutes. 

3. Cryptocurrency competition.

Bitcoin is the most popular cryptocurrency in the world. However, there are many other currencies besides it. 

Their availability allows for asset diversification, which makes the cryptocurrency industry attractive to investors. Due to fierce competition, Bitcoin’s value can remain fairly stable. It is safe to say that if Bitcoin were the only cryptocurrency, its price would vary greatly. 

4. Government Regulation

Because Bitcoin is a relatively new form of asset, governments often can’t decide exactly how to classify it. Because of this, many countries are hesitant to take a definitive stance on Bitcoin. They often make changes to existing laws, including the taxation system. 

Bitcoin is decentralized (that is, it is not tied to any particular central government), so the regulatory rules that apply to investors can directly affect the price. If investors have concerns about a particular government’s position or decision, it can cause BTC to fall. 

Today, Bitcoin is regulated differently in different countries. More often than not, while states take a neutral stance on Bitcoin, large traders and investors must follow KYC (“know your customer”) rules and anti-money laundering policies. 

5. Media Coverage

In our world, the media can’t help but influence the price of Bitcoin. Many studies are devoted to this correlation, but in a nutshell: an increase in the price of Bitcoin can be linked to positive media coverage. Conversely, negative reviews can cause the price to fall. 

In general, the media is thought to help people better understand how Bitcoin works and provoke interest in the cryptocurrency. Suppose you have just read an article about the merits of Bitcoin and you are impressed with it. Chances are, you will tell your family and friends about Bitcoin and they will probably do the same. In this age of social media, such news can spread in seconds. 

Conclusion

We have listed the most important factors that influence the current Bitcoin price. However, it is important to understand that cryptocurrencies are constantly evolving, and things can still change. We’ll wait and see. 

We don’t know if we will find the answers to our questions. The best thing we can do is to stay informed. Study all information about Bitcoin, not only to minimize your risks, but also to be prepared for any eventuality – and something is bound to happen. Knowledge is power, so always strive for new knowledge and never limit yourself to the information you have.