Dynamics that Determines the Price of Bitcoin?

Dynamics that Determines the Price of Bitcoin? 

Market forces called supply and demand can influence the price of Bitcoin. The price decreases when there are more sellers in the market and increases when there are more buyers. 

Bitcoin (BTC) is a digital coin that is not issued by any government or legal body, unlike fiat currencies such as the dollar, pound, euro, and yen. To create, buy, store, and move BTC, a dispersed network of users and cryptographic protocols are needed.

Investors can carry out their commercial transactions directly without a middleman. The peer-to-peer network removes trade restrictions and streamlines commerce. Satoshi Nakamoto proposed the world's first cryptocurrency in 2008, which was launched in January 2009.

Bitcoin Valuation

The number of businesses accepting Bitcoin is growing every day, giving it a real market value. However, virtual currency has been vulnerable to security issues and is highly volatile. It has been challenging to find answers to common questions like what determines Bitcoin's value, who sets Bitcoin’s price, and whether Bitcoin has intrinsic value.

The same set of market dynamics, ‘supply and demand,’ that affect the price of other goods and services also decide the value of Bitcoin. Prices rise and fall depending on the number of buyers and sellers. It is important to note that the price of Bitcoin is not determined by a single entity, nor can it be traded in a single location. Based on supply and demand, each market or exchange sets its own price.

Factors Impacting the Bitcoin Price?

Various factors can impact the price of Bitcoin, including supply and demand of BTC, competition from other cryptocurrencies, cost of production, and regulation.

Supply and Demand

Those with a background in economics are aware of the law of supply and demand. Supply and demand are the market forces that work together to determine the market price. The demand for an economic good declines as the price increases, and rises with the fall in prices.

Competitions and News

BTC faces competition from altcoins like Ethereum (ETH) and meme coins like Dogecoin (DOGE), making portfolio diversification appealing to investors. The upgrades to the existing cryptocurrencies can push BTC's price down. This is in contrast to a completely different setup in which Bitcoin was the only digital currency. Media coverage can influence investors’ decisions to buy crypto assets with a positive outlook and ignore those with a shady future. 

Production Costs

Bitcoin production costs include infrastructure costs, mining electricity charges, and the difficulty level of the mathematical algorithm (an indirect cost). The various levels of difficulty in BTC's algorithms can slow or accelerate the currency's production, affecting Bitcoin's supply and, its price too.

Regulations

Cryptocurrency regulations are ever-changing. Countries like El Salvador have accepted it as legal tender, while China has formally banned crypto transactions. BTC prices are subject to government policy decisions. Regulatory uncertainty among investors could impact the value of Bitcoin as well.

An Asset with a High Volatility

Uncertainty regarding the intrinsic value of Bitcoin and BTC's future value makes it a highly volatile asset. The Bitcoin market is quite small compared to other industries, and media coverage alone can drive its price up or down. For instance, news about Tesla's announcement to accept BTC will drive its value upwards or vice-versa, making Bitcoin’s price highly volatile.

Similarly, a tweet that the Bitcoin blockchain has been halted can drive its value down and reduce the trading volume. So, considering the high volatility, can the Bitcoin price fall to zero?

Technically, the answer is yes. It is possible. The price of BTC is not pegged to any fiat currency like the U.S. dollar or any other real-world asset and is susceptible to value crashes. However, we saw last month that algorithmic stablecoins like Terra USD crashed to nothing and created turbulence in the market. 

The complex Bitcoin architecture is not easy to destroy, although its scalability issues may put its future at risk. Many are wondering, given the Chinese predictions that BTC's price will fall to zero.

If the price of Bitcoin falls to zero,

• It will impact traders, institutional investors, the price of other digital currencies, cryptocurrency enterprises, and the whole financial system. 

• It will also impact the price of other cryptocurrencies. Investors could just withdraw (completely or substantially) to reduce losses, depending on their type of investment. 

• Large institutional investors may be particularly at risk because more and more have made huge investments to diversify their portfolios. The most exposed would be those who invested more recently at high prices or in crypto derivatives, and they would need to liquidate other assets to fulfill margin calls.

• Customers may lose faith in a system that appears to be crumbling, affecting crypto-based companies like Coinbase, and Binance, which depend on customers for transaction flow to generate revenue and investments to grow. Investments in these companies may also stop altogether or significantly decline. Additionally, such enterprises may no longer be able to hire, pay or attract the personnel necessary to run and expand them.