More people have started investing with the rise in the value and buzz around bitcoin. If you cannot understand the reason behind the rise and fall in the value of bitcoin, this article can help you. Bitcoin is notoriously volatile. Being one of the most volatile currencies ever, you don’t need to be surprised about huge jumps and value losses. We all have seen how bitcoin prices have risen and fallen by 10% on the exact due date.
But, by going through this article, you will come across the primary reason that causes this volatility.
What makes up the value of bitcoin?
Virtual currencies are not governed by a monetary agency or a central authority. Since the government backs fiat currencies, citizens have more faith in them. But, a similar method is not possible with cryptocurrency. Certain essential factors that affect the value of a virtual currency include:
- Demand and supply of the currency
- Cost of production of the cryptocurrency
- Its availability on the exchange
- Exchange with other cryptos
- Governance and regulations.
Let’s discuss all these factors in detail:
Demand and supply factor
Everything in the world has a definite demand and supply. Thus, the value of any asset is determined by its overall supply and demand. When the need for bitcoin is on the higher end, and the supply side is on the lower end, the price and the value of the item will be below. The same factor applies to cryptocurrencies like bitcoin.
Cryptocurrencies like bitcoin come up in a restricted and limited amount. But, many currencies also have a method to burn the existing token to prevent the supply from being too large. In this case, burning means sending the crypto to an unknown and unrecoverable address on the blockchain network. The policy associated with different crypto is not the same. For example, the supply of bitcoin increases whenever an additional block gets added.
On the other hand, you will get a fixed reward when a block of Etherium is added. Thus, since the supply is not fixed, the demand also shifts. So, demand and supply are essential factors that determine the cost of bitcoin.
The production cost
All types of cryptos are manufactured by a process called mining. Mining is done using a supercomputer that verifies every block part of the blockchain network. The miners work in a decentralized way, and they get rewarded as per the number of blocks added.
This verification process of each block requires significant computing power. It also requires miners to invest in expensive equipment and tools. Thus, the more competition there is in mining, the more will be the price of bitcoin. Miners also race each other in case of solving challenging mathematical problems. Thus, the value of bitcoin is highly dependent on the miming cost involved.
The crypto exchange
Crypto Currencies like bitcoins and Ethereum are traded on different bitcoin exchanges. But, many cryptos are not traded on exchanges. Moreover, many wallets providers also can swap the currency across different exchanges. Thus, in case a cryptocurrency is traded on a small and less known exchange, the spread of the exchange may be too high for investors. But, if specific cryptos are listed on many exchanges, it can also increase the number of investors who want to trade in them. Thus, in this case, the demand for the currency will be higher.
Competition is another essential feature that can impact the value and price of bitcoin. There are lots of virtual currencies that are listed on exchanges every day. In addition, many businesses and countries have developed their cryptos in the last few months. For example, the popularity of bitcoin makes it prone to lots of competition. The more competition for a particular currency, the more prominent will be its value.
So, these were the significant factors that determine the worth of a virtual currency such as bitcoin. The core principle behind this is the demand and supply gap. Therefore, you can make wiser decisions about investing by understanding these factors. Furthermore, before you plan to invest in bitcoins, you should know that the government does not have any well-planned practice to regulate virtual currency. Read this review to know more about bitcoin mining.