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What influences the Bitcoin price?
The price of Bitcoin is changing from day to day: from incredible heights to great lows. But why is the price so volatile? Which factors affect the value of Bitcoin the most and create the opinion that Bitcoin is a bubble?
- Government regulations. When a government of a country (with many BTC traders) enacts a law related to Bitcoin, it affects the price immediately. For example, Bitcoin fell by $1,000 after South Korea said that it may ban cryptocurrency trading. News that the country just wants to make trading more transparent, but doesn't plan to close the exchanges strongly lifted the price.
- The monetary policy of key central banks. Here we can mention the opinion of the chief investment officer at Bleakley Advisory Group Peter Boockvar, who said that a cryptocurrency bubble appeared because of quantitative easing (QE). The biggest central banks in the world flooded the monetary system with a lot of cheap money to help their economies overcome the financial crisis. Investors used this cheap funds, among other things, to invest in cryptocurrencies. Nowadays, central banks started or get ready to taper QE, so according to the logic of Mr. Boockvar, Bitcoin price will be falling.
- News. Media form the mind of people. News can affect the price both in a positive and in a negative way. For example, news about hacks or closings of Bitcoin-related websites and services cause worries among Bitcoin users. At the same time, news about the opening of BTC futures trading at the established exchanges such as CBOE and CME raised the price of Bitcoin.
- Demand. Media form people’s mind and at the same time, people’s attitude to cryptocurrency creates its price. It means that the price will be as high as much money people are ready to pay for Bitcoin. There is an interesting conception of FOMO = fear of missing out. Looking at the rising price of Bitcoin, people worry about missing an opportunity of investing in it and start to buy Bitcoins faster.
- Supply. High demand and low supply lead to the growth of a price. Bitcoin, for instance, has a limited supply, the total number must be no more than 21 million tokens. Limited supply causes speculations that make the price go up.
- Valuation. There are two parameters of measuring a currency's value. They are a store of value and an exchange value. Exchange value is a crucial point for Bitcoin now. When a large company starts accepting cryptocurrency, the price of Bitcoin rises because its turnover rises. At the same time, price fluctuations make it harder to use Bitcoin as a means of payment and the number of companies doing so is still small. So far, the main reason why people bought Bitcoin is that they wanted to use it as the store of value like gold. Anyway, as the cryptocurrency market is relatively new, there's no reliable way to say what Bitcoin's fair value is. This uncertainty makes the price more volatile.
- Intentional market manipulations. Large players can purchase a huge amount of Bitcoins from the market causing the rise of the price before dumping Bitcoins back to the market.
- Technical issues and development. There are some technical issues related Bitcoin’s blockchain. It takes the blockchain significant time to process transactions. Visa can process more transactions during a short period of time. This is called Bitcoin's scalability problem. New solutions like SegWit and Lightening network will help to solve this problem. This will have a positive effect on BTC.
To sum up, we can say that nowadays, as cryptocurrencies are not perceived as fiat currencies yet, the market sentiment about Bitcoin has the biggest impact on its price. Bitcoin’s value is not a liability of any government, so there are no guarantees that it won’t fall to zero. At the same time, as long as Bitcoin can be bought and exchanged for other money, it will live. It is important how much people believe in the success of Bitcoin and how much money they are ready to invest in it.