Bitcoin Price Changes – What Causes the Fluctuation
On our previous article we talked about the top 10 Cryptocurrency to invest – On this article we will look at all variables that influences the price changes and value of bitcoin.
We all know that the value and price of Bitcoin is measured against Fiat Money. Where Fiat money means a currency declared as a legal tender by the government but not backed with gold or any other physical commodity. Read more about fiat money on Investopedia.
Bitcoin therefore appears very similar to any currency traded on foreign exchange markets. Unlike fiat currencies/money, bitcoin has no official price. What it has is only various averages which is based on price feeds on global exchanges.
It is normal for Bitcoin to trade on any single exchange at a price a bit different to the average.
Now to the big question, “what factors determine the price of Bitcoin?”
Demand and Supply
The answer to “what determines bitcoin price?” is Demand and Supply.
Price discovery take place at the meeting point between demand from the buyers, as well as supply from the sellers.
Putting the model of demand and supply in consideration, it will be clear that the majority of supply is control by early the adopters and miners of bitcoin.
With a mining reward of 12.5 BTC per block, Bitcoin supply is inflating around 4 percentage every year. This rate will definitely drop in 2020, when the next reward halving will occurs.
That the price of Bitcoin is rising despite high inflation, it indicates an extreme strong demand.
On daily basis, buyers absorb thousands of coins offered by miners and sellers.
The best way to calculate demand from new entrants into the market is to monitor Google trend for the search word “Bitcoin.”
Such reflection of the public interest tends to have a strong correlation with the price.
A very high levels of the public interest may exaggerate price action, uninformed speculators, media reports of rising Bitcoin prices draw in greedy and creating a feedback loop.
This will lead to a bubble shortly maybe followed by a crash.
Bitcoin has experienced two such cycles and will likely experience more and more in the future.
Bitcoin was designed to have a fixed supply of only Twenty-one (21) million coins, over half of which have already been produced.
The early adopters of bitcoin were wise enough to earn, buy and mine vast quantities of Bitcoin before it held a significant value.
Satoshi Nakamoto the creator of bitcoin – is thought to hold a million bitcoins which is close to 4.75% of the total supply of 21 million.
If Satoshi Nakamoto happen to dump these coins on the market, the supply glut would definitely collapse the price.
The same applies to any major holder. However, any individual seeking to maximize their returns would distribute their sales over time, in other to minimize price impact.
Miners as at recent, produces around 3,600 bitcoins each day. Some portion of the coin they sell to cover up for electricity and other business expenses.
The daily cost of power for all mining is estimated to around $500,000.
When you divide that total cost by the current BTCUSD price, it will provide an approximation of minimum number of bitcoins that miners supply to market on daily basis.
The Fiat Currency Crises Effect
A Bitcoin wallet can be much more safer than a bank account.
Cypriots learnt the hard way when their savings were totally confiscated in early 2013. This event was reported to have caused a price surge – savers rethought the relative risks of banking compared to Bitcoin.
The next that occurred was in Greece, where strict capital controls were imposed in the year 2015.
Greeks were subjected to a daily withdrawal limit of only €60. Bitcoin demonstrated its value again here as money without a central control.
Next after the Greek crisis, China began to devalue their currency (Yuan). As a result the Chinese savers turned to Bitcoin in other to protect their accumulated wealth.
A recent positive influencer of the Bitcoin price, “or lets say perception”, is the Argentina’s situation.
The elected President, Mauricio Macri, pledged to end capital controls. This would definitely eliminate the wide disparity between the official and black-market Peso to USD exchange rates.
Argentinians who can purchase bitcoins started using black-market dollars which will likely avoid considerable financial pain.
Market Manipulation Effect
Bitcoin price will never be complete without talking about the role played by market manipulations in adding to price volatility.
At that time, Bitcoin got high above $1000 it was partly driven by an automated trading bots or algorithms, running on the Mt. Gox exchange.
All facts shows that these bots were operating fraudulently under the direction of the exchange operator, Mark Karpeles, bidding up the price with a phantom funds. Mt. Gox was the major Bitcoin exchange then and as well the undisputed market leader.
In recent days, there are many large exchanges. Therefore, a single exchange going “the other way round” would not have such an outsize effect on general price.
Major Downside Risks
There is no doubt that, Bitcoin is an experimental project and as such, a very risky asset at that.
There are lots of negative influencers of price, top among them being the legislative risk of government banning or strictly regulating the Bitcoin businesses.
The risk of Bitcoin network forking along several development paths is also something which would be able to undermine the price.
Again, the coming up of a credible competitor, maybe with the backing of major (central) banks, could see Bitcoin lose market share in the nearest future.
It is possible that the exchange price may be totally different from the consensus price – as occurred for a sustained period on Mt. Gox before its failure, and on the Winkelevoss’ Gemini exchange.
In Nov 2015, BTC-USD hit $2200 on Gemini while trading within $330 on other exchanges. Although the trades were later reversed.
Such events occurs occasionally across different exchange, it can be cause either due to human or the software/application error.
Bitcoin ultimately is worth what people will buy and may want to sell it for. This is often a matter of human psychology as due to economic calculation.
Do not allow your emotions to dictate your actions in the general bitcoin market. It is best achieved by determining a strategy which you will sticking to.
If your main objective is to accumulate Bitcoin, a perfect method is to set aside a fixed and affordable sum every month to purchase bitcoins at whatever price.
On a long while, this strategy, will allow you to easily accumulate bitcoins at a decent average price without stress of trying to predict the market.