What determines the price of Bitcoin?

Most of us know that Bitcoin is not created and distributed by a person, institution, government or bank; Therefore, individuals and institutions do not have a role in valuing and determining its price. For this reason, determining the price of Bitcoin is always one of the difficult topics. In the meantime, we should not forget that some institutions such as the United States Securities and Exchange Commission classify Bitcoin as a security; But some others look at Bitcoin as a commodity.

According to some, Bitcoin is like gold and should be considered as a store of value. On the other hand, there are some people who believe that this is a new way to empty people’s pockets and only a special few will benefit from it. Whatever Bitcoin is, it has become a very bold and inseparable part of our human lives. So it’s not bad to know a little bit about how Bitcoin is priced and the factors affecting it.

In this article, we are going to talk about how to value the price of Bitcoin and the factors affecting it and answer the question why the price of Bitcoin fluctuates and what will happen if Bitcoin loses its value? So stay with us until the end of this article.

How is the price of Bitcoin valued?

Forces such as supply and demand affect the price of Bitcoin. It is an economic principle that whenever there are more sellers, prices decrease and when there are more buyers, prices increase.

As we mentioned, there is no government or legal entity behind the release of Bitcoin. This is in stark contrast to fiat currencies such as the dollar and pound that governments print and supply. In general, creating, storing and transferring Bitcoin requires a decentralized network of users, and this process must be done in the form of cryptographic protocols.

Investors in Bitcoin are not connected with any intermediaries and do their business transactions directly. Peer-to-peer networks used in digital currencies, especially Bitcoin, have removed transaction restrictions and facilitated trade. Let’s not forget that the first person who introduced the world’s peer-to-peer network and digital currency to the world in 2009 was Satoshi Nakamoto.

Read more: Who is Satoshi Nakamoto?

Since then, the number of businesses that accept Bitcoin as an official currency and unit of account has increased, giving Bitcoin a real market value. Of course, it should not be denied that Bitcoin has not been free of many problems and price fluctuations. Despite the popularity of this digital currency, the answer to questions such as what determines the price of Bitcoin? Who sets the price of Bitcoin? Does Bitcoin have intrinsic value or not? It is not so easy.

One of the factors that determine the price of Bitcoin is the common logic of the market, i.e. supply and demand, which also affects the price of other goods and services; But this supply and demand is a little different due to the lack of presence of various institutions or governments and the Bitcoin supply model, which we will talk more about later.

What factors affect the price of Bitcoin?

There are various factors in the market that affect the price of assets. Some of these factors are:

Having and Supply and Demand

If you are familiar with economics, you definitely know about the phenomenon of product supply and demand. Supply and demand forces work together to determine the market price and quantity of a certain product. For example, when the price of a good becomes more expensive, the demand for it decreases and sellers produce more of that good, or vice versa.

We mentioned earlier that the process of supply and demand in Bitcoin is a little different. One of the factors that plays a direct role in the supply and demand of Bitcoin is the Bitcoin Halving event. Almost every four years, the reward for mining Bitcoin blocks in the blockchain is halved, which makes Bitcoin more scarce and increases its demand. The same thing can increase the price of Bitcoin.

Another important point is that Bitcoin is created with a limit of 21 million coins. This means that when the number of circulating bitcoins reaches this level, miners will no longer be able to mine any bitcoins. So at that time, the halving event and block reward will no longer be meaningful. At that point in time, with the withdrawal of the halving event and the end of Bitcoin mining, the real use of Bitcoin in life will determine its value.

News And Competition with other digital currencies

Users use altcoins like Ethereum to diversify their asset portfolio; Assets competing with Bitcoin. Unlike the time when Bitcoin was the only digital currency available and had no competitors in this field, it is always a matter that the price of Bitcoin will decrease slightly with the update and entry of other currencies; Because as Bitcoin is progressing, other digital currencies are also progressing. At the same time, positive news about the price and upward trend of these currencies can make them ignore their uncertain future and lead users to buy these assets.

The cost of making bitcoins

Bitcoin mining process is associated with various costs. The cost of equipment and electricity and the difficulty of mining, which is an indirect factor and is related to the power of the equipment used, all determine the cost of producing Bitcoin. When the difficulty level of Bitcoin increases and decreases, the speed of Bitcoin mining will also fluctuate, and this issue will affect the supply and ultimately the price of Bitcoin.

Laws and Government regulations

Bitcoin regulations are constantly changing. Countries like El Salvador have accepted Bitcoin as legal tender. On the other hand, a country like China has banned digital currency transactions; Therefore, the rules are variable and varied. So if there is concern that a country will take legal action against digital currencies and Bitcoin, the price of Bitcoin will go down. In addition, legal uncertainty and regulations about digital currency will cause fear among investors and as a result, the price of Bitcoin will fall further.

Why does the price of Bitcoin fluctuate?

The lack of certainty and certainty regarding the intrinsic value and future of Bitcoin makes it a volatile asset..

Due to the existence of a limited number of bitcoins, of which more than 19 million coins have been mined, with the passage of time, less bitcoins will be mined. In order to maintain the price and prevent a sharp decline, demand must match supply. We should not forget that the Bitcoin market is relatively small compared to other industries and its price can be increased or decreased only by media coverage. For example, the news about Tesla’s willingness to accept Bitcoin caused the price of Bitcoin to increase; Therefore, Bitcoin has shown to be highly volatile.

On the other hand, with the publication of a tweet or news that the Bitcoin blockchain has stopped, the value of Bitcoin will decrease drastically, and accordingly, the volume of transactions of this asset will also decrease. Now the question arises that considering this volume of fluctuation, is it possible for the price of Bitcoin to reach zero? Technically YesSuch an event is possible. The price of Bitcoin is not tied to any other asset, such as the US dollar or gold, and it is possible for it to lose value. However, not being dependent on a particular property cannot prove anything by itself; Because stablecoins such as Terra, despite being dependent on the US dollar, experienced severe fluctuations and collapse.

However, if such a catastrophic event were to happen to Bitcoin, it would not happen overnight, and there would be many danger lights on before then. For example, a very long bull market period can be a sign of a Bitcoin crash; So investors will have enough time to protect their capital. Another important point is that the complex architecture of Bitcoin will not be destroyed so easily. Another point is that Bitcoin has a scalability problem and has not been able to respond to the volume of transaction demand as it should; But this does not mean that the value of Bitcoin will be zero all at once.

What will happen if the price of Bitcoin goes to zero?

If the price of Bitcoin reaches zero, the wave will cover all traders, institutional investors, the price of other digital currencies, companies related to digital assets, and the entire financial system in general. If we assume that the price of Bitcoin reaches zero, the price of other digital currencies will not be fixed either. Following such an event, many investors withdraw their money from the market to avoid losses, and the same event means that many assets become devalued.

In the event of this disaster, large institutional investors will be highly exposed to risk; Because their investment amounts are much bigger. The most at risk are those who have invested in the market at the peak of prices and have to liquidate their other assets in order not to call margin on their transactions.

If Bitcoin goes to zero, customers will no longer trust the deteriorating system; Therefore, large companies such as Coinbase and Binance, whose income comes from customer transactions, will be severely affected. It is also possible that investment in these companies will be severely reduced or completely stopped. In addition, these companies may no longer be able to hire anyone and many people will be out of a job. In addition, this financial pandemic may also temporarily damage other financial systems in the world. Some of these injuries include:

• The heavy selling pressure on other assets to fulfill financial obligations such as paying salaries and fees, preventing margins from becoming expensive, maintaining the possibility and many other issues will cause damage to the structure of the global economy.
• The accumulation of debts and the increase in unpaid loans due to the inability to pay make other financial systems of the world not safe from such an event.

Conclusion

In this article, we observed that Bitcoin is also subject to conventional rules in economics such as supply and demand. The more buyers, the higher the price, and the more sellers, the lower the price. At the same time, no specific person or entity created Bitcoin to be able to set a price for it. Factors such as competition with other currencies, news, laws, and governments’ approaches to Bitcoin have a major impact on Bitcoin’s valuation.

In recent years, many investors have been attracted to Bitcoin, and this has caused it to find a very good user base, and as a result, its value has increased at times; But Bitcoin is a volatile asset and no one can prevent its value from fluctuating and even falling.

Although the probability of Bitcoin reaching zero is not very likely, it cannot be completely rejected; Of course, the complex architecture of Bitcoin does not seem to allow such an event. If one day the price of Bitcoin goes to zero, there will certainly be clear warnings before then.

In your opinion, what factor has been effective in the sharp drop in the price of Bitcoin these days? Are you one of those people who think that the price of Bitcoin will eventually reach zero?