What Affects the Price of Bitcoin and Other Cryptocurrencies

Bitcoin is well known for its wild price movements. Read this article to find out about the underlying reasons that define Bitcoin's instability and learn how and why the price of the leading crypto gets affected.
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The price of Bitcoin has been going up and down throughout its 10-year history, causing a great deal of anxiety. As these price swings have an impact on the rest of the market, many first-time crypto investors wonder what affects the price of Bitcoin and how to predict it. In this article, we explore the main factors behind the price of any cryptocurrency, BTC included.

Factor 1: Supply and Demand

On the most general level, the price of any coin depends on its supply-demand ratio. In this sense, Bitcoins is similar to any other asset on the market.

As you probably know, the supply of most cryptocurrencies is limited by their protocols. For example, the total supply of BTC is 21,000,000 coins, and there never be more. It creates scarcity that naturally increases the value and price of the coin and prevents inflation. At least, that’s the theory.

The current demand for a coin depends on how many people want it. For instance, if your coin has been going up for some time, a lot of people seek to buy it and few holders are ready to sell it. Therefore, the price of the coin goes up. In the opposite situation, it goes down. That’s the key principle of any market — the less available and the more desirable some asset is, the higher its price goes.

The number of Bitcoin wallets grew from 1,4 to 46,8 mln between 2014 and 2020. Image source: CryptoDiffer

Factor 2: Community Size

The community size is what greatly affects the price of Bitcoin or any other crypto. A big community signals that this coin has broad support. It is used by many businesses and individuals, and this wide acceptance promotes further growth.

An indicator that reflects the size of a coin’s community is node count. It is the number of active wallets (nodes) that you can find on the cryptocurrency website. Normally, the bigger the number of active wallets is, the stronger the community. It also means a higher price and bigger market capitalization.

Note that if the market cap of some crypto is big but its node count is relatively small, this coin is overbought (i.e. its current price is bigger than its true value). So, the price is likely to get corrected at some point.

Ethereum offers the same things as other blockchains but “can do much more”, and it adds value to the project. Image source: Ethereum

Factor 3: Practical Value

The practical value of a crypto affects its price, too. As you know, most cryptocurrencies have (or claim to have) some feature that addresses a certain problem or serves a specific purpose. For example, the goal of BTC is to make payments fast, cheap, borderless, and secure. The goal of Monero and other privacy coins is to make crypto transactions confidential, the goal of Ripple is to improve and modernize the existing financial infrastructure, and so on.

If a coin addresses an important problem, it has a greater potential for growth, higher value, and higher price. On the contrary, a coin that has no distinctive features and lacks clear goals tends to have a lower value/price.

To evaluate this parameter, have a look at the size of the community, read the White Paper of the project, or consult an experienced user.

The Pump-and Dump scheme is one of the dirty tricks that may affect the price of a new crypto. Image source: PEC Nature Camp

Factor 4: Market Speculations

Many people see cryptocurrency as a speculation tool rather than something they would use in their everyday life. The primary goal of these speculative investors is to make a profit out of crypto. If many of them buy or sell quickly, no matter the reason, it results in price swings (short-term price fluctuations).

Price swings can also happen when a “whale” moves a large amount of some cryptocurrency. Such massive trades tend to have a big impact on the crypto market. 

The graph, showing how the mining reward decreases with every halving. Image source: Investopedia

Factor 5: Difficulty of Mining/ Production Cost

Mining is the process of verifying new crypto transactions and adding them to the blockchain. It also results in issuing new coins.

In a Proof-of-Work (PoW) system, miners often use expensive hardware that consumes a lot of energy. In return, a lucky miner who solves the next block gets a fixed number of coins as a reward . Most miners sell this reward immediately to cover their expenses. Thus, new coins enter the market regularly.

With time, the difficulty of mining increases, and the block reward gets cut in half - this event is called halving. As a consequence, new coins become more scarce and more difficult to obtain. The production cost of 1 BTC increases — and this is what affects the market price of Bitcoin, too.

So far, Bitcoins has experienced three halvings. Each of them resulted in noticeable price growth.

The map showing how crypto regulation varies across the countries.

Factor 6: Regulatory and Political Issues

The cryptocurrency market is developing at a fast pace, and lawmakers have difficulty keeping up with it. As a result, the current crypto regulation lacks consistency: almost every country has its own vision of crypto and applies its own rules. Some states encourage cryptocurrency use and welcome blockchain startups. Others allow them to operate in the grey zone, or prohibit them altogether. This inconsistency is a major barrier to the global adoption of crypto, as it discourages institutional investors and everyday users who prefer to rely on well-established financial tools instead.

Also, any serious change in the crypto regulation can affect the price of a digital currency in a positive or negative way, as it affects its present and future. Just remember the sharp price rise that happened after Japan recognized BTC as legal tender in April 2007.

In some cases, the situation is the opposite. For instance, if a powerful country bans certain crypto, it reduces the number of transactions and makes investors and exchanges stay away from this coin. Accordingly, its price is likely to drop, even is the coin itself is good.

Ethereum: the updated road map shows how the ecosystem will be developing in the nearest future. Image source: MangoResearch

Factor 7: Ecosystem Development

Even the most popular cryptos like Bitcoin and Ethereum have their issues. As the system develops and grows, it may face some challenges.

Currently, the biggest problem of the Bitcoin network is its limited scalability. It means the network is unable to successfully cope with the increasing number of transactions users send. It negatively affects the performance of the system and increases the average waiting time.

Other coins have their downsides and vulnerabilities, too. These flaws may decrease the practical value and price of a coin. Especially when the team behind it does not work on solutions and shares no plans to overcome these challenges.

Top coins by market cap (by June 2020). Image source: CoinMarketCap

Factor 8: Competition 

Bitcoin is the father of all cryptos. But, as is often the case, kids challenge their parents and learn from their mistakes.

In fact, many altcoins are structurally similar to BTC. However, they may offer additional benefits and improvements to meet the specific needs of their target audiences. For instance, Monero (XRM) provides confidentiality, Litecoin is more suitable for dealing with smaller payments, Ethereum applies smart contracts, etc.

Right now, BTC is leading the market, leaving the other cryptos far behind. But over time, one of these outsiders can take leadership if BTC fails to meet our expectations. In this case, the price of Bitcoin may drop, leaving many long-term investors disappointed.

Michael Novogratz, one of the major crypto influencers, is famous for his bold predictions of BTC prices.

Factor 9: News and Predictions

As the crypto market is still very young and small, it is over-sensitive to positive and negative news.

For example, if a prominent expert predicts that XYZ will be worth $50,000 in 5 years, it may inspire a lot of people to buy this coin asap. On the contrary, when there’s a rumor about a new restrictive law coming into force soon, it may drive the prices down.

If you’ve been following the news, you remember that the price of BTC started to grow at the beginning of the COVID-19 pandemic, as many people saw this coin as a safe-haven asset. But then the price started to go down, and on March 12, 2020, BTC had a really bad day. Its price dropped by 20% in 15 min. It happened because a lot of traders started to panic-sell risky assets after the situation had gone from bad to worse.

That is why it’s important to follow the news. It helps get an idea of what is happening and why. At least, don’t ignore major scandals (like massive hacking attacks) or big law battles. They can reveal serious vulnerabilities of the coin. Or even kill it. 

The graph showing the Btc price dynamics earlier this year. Image source: The Coinbase Blog

Factor 10: The Overall Situation on the Financial Market

Last but not least, the price of BTC and other cryptos depends on the overall situation on the market. As you know, these prices are expressed in fiat currencies like USD. It means that if USD weakens, while BTC maintains its market positions, the price of BTC will increase with respect to the dollar. It works the other way, too.

So, when people start losing trust in centralized currencies (because they lack trust in the governments that issue them), they might turn to cryptos. The growing demand drives the price up until this market mood changes.

What Affects the Price Of Bitcoin: Conclusion 

Hopefully, after reading this article you can explain what affects the price of Bitcoin if someone asks you about it. Most likely, any sharp price correction can be explained by one of the 10 reasons we described.

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