Since its launch in 2009, bitcoin has gone from a few cents to tens of thousands of dollars in value. As such, it has made a decent profit for early adopters of the cryptocurrency, with many bitcoin millionaires enjoying their return on investment today. Nevertheless, those who keep a keen eye on the latest crypto news will undoubtedly be aware that the price of bitcoin has been on the decline over the past few months.
Why, then, is the value of bitcoin subject to such wild fluctuations? Understanding the factors that affect the price of a cryptocurrency is an essential tool for analyzing the market and assessing when the best moments are to buy and sell. With that in mind, we’ll take a look at some of the main contributors to the value of bitcoin below.
regulation
When bitcoin was brought to the world a decade ago by the mysterious Satoshi Nakamoto, it completely revolutionized the finance industry. As a decentralized currency based on blockchain technology, it does not require the administration or regulation of a central bank or other authority. However, in the past few years, governments around the world have woken up to the potential – and pitfalls – of bitcoin and introduced legislation regarding it. Some have reacted positively, with El Salvador becoming the first country to adopt it as a national currency, while others have been more secure in their reaction – all but one affecting its value.
corporate attitude
As governments and other regulatory bodies are open to adopting bitcoin, so is the corporate world. Of course, it is still not possible for most shops on the high street to use cryptocurrency to pay for goods and services – but that seems to be changing. Tech companies are surprisingly at the forefront of the transition, with big names like Tesla and Microsoft now accepting bitcoin as a form of payment for their services. However, some firms in hospitality and retail (including Burger King and Walmart) have also started accepting bitcoin. This affects its overall public perception and makes it more desirable.
supply
Bitcoin is provided (or “mined”) to “miners” who solve complex computer equations to verify transactions on their blockchain ledger. However, the value of this reward is halved after a certain number of transactions (210,000), which occur approximately every four years. This means that while the reward itself becomes less valuable, the total value of one bitcoin will simultaneously increase. At the same time, bitcoiners have a limited number of bitcoins at their disposal (21 million in total) that will eventually run out. The algorithms that control the production of cryptocurrency strictly control its generation rate and over time, it will slow down. As supply decreases, the price is affected.
whale activity
Just as in the traditional stock market, the objective of a shrewd investor is to buy low and sell high. However, bitcoin’s relatively low market cap ($442 billion in January 2021 compared to gold’s $11 trillion market cap, for example) means that it is susceptible to manipulation by major players. These individuals are known as whales and can hoard large amounts of the cryptocurrency, thus increasing confidence in bitcoin and increasing its value, before selling off their stash in one fell swoop. And the market crashed. This is known as pump-and-dump and can be disastrous for everyday investors with small amounts of capital.
The secret to making smart bitcoin investments is to understand how and why its value changes. These four factors are the biggest contributors to the peaks and troughs of this powerful cryptocurrency.
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