To begin with, one factor that has influenced the rise and fall in Bitcoin’s value as witnessed over the years is public perception. Perceptions are mostly shaped by news headlines.
For the most part, when the media focuses on Bitcoin’s volatility with speeches about events like China’s recent crackdown on cryptocurrencies, the market panics. A negative perception prevails and the price of bitcoin falls as people panic by selling.
Similarly, when the media talks about how Bitcoin millionaires are on the rise, the market explodes and demand goes up. Therefore, what the media conveys about bitcoin has an impact on its price and therefore on its overall valuation.
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Demand for Bitcoin
As is the case with most commodities, an increase in demand will cause an increase in its value. What drives demand for bitcoin is a bit complicated, but one factor that remains relevant is how many people want it compared to other assets.
For example, while gold was once in high demand due to its status as a final store of value, demand has since declined over time with the rise of digital assets such as Bitcoin that mimic the characteristics of gold.
Similarly, the demand for Bitcoin and therefore its value is driven by the need in the market for a decentralized autonomous currency that offers more control than fiat alternatives. After all, Bitcoin emerged during the 2008 financial crisis as a technology that allows anyone to be their own bank free from third-party control.
While many cryptocurrencies offer similar characteristics, Bitcoin remains the most tried and tested cryptocurrency and therefore the one with the greatest demand. Because of this, Bitcoin boasts the largest market valuation in the crypto space.
Bitcoin’s deflationary supply
Similarly, the supply of bitcoin compared to what is demanded will have an impact on its valuation. The supply of bitcoins is limited as their total supply is limited to 21 million coins. Therefore, as more and more people demand bitcoin and move away from the tyranny of fiat currencies, the price rises because there are simply fewer units to buy.
For example, if a person was willing to buy 0.1 bitcoins at $100 and then another person came along and wanted to buy the same amount, the price would most likely rise because there simply isn’t enough bitcoin volume for both. Bitcoin also has a deflationary supply system built into its infrastructure.
As new bitcoins are produced and distributed to miners for the first time as a reward for their work, the next batch of bitcoin prizes is halved for every 210,000 mined blocks which are roughly every four years. This deflationary mechanism reduces the supply of bitcoins over time, thus increasing its price.
Production costs
Bitcoin’s production costs also have an impact on valuation. Since miners are responsible for safeguarding the network, through clearing transactions, they bear much of the cost of producing new bitcoins in circulation. Since bitcoin is a proof-of-work blockchain, this production process is energy-intensive.
The cost of electricity determines the availability of miners on the Bitcoin network. With more miners in the network, Bitcoin’s hash rate or computing power increases. This makes the network more stable and with stability increases trust in Bitcoin among the general public. This leads to an increase in price and valuation. As production costs rise, fewer miners are willing to participate and therefore the network becomes less stable.
Rising mining costs have led to some noteworthy events in recent months when Bitcoin’s hash rate and price have declined as China announces it is banning everything related to cryptocurrencies.
regulation
The price of Bitcoin is also influenced by the idea of whether a government will legalize and regulate bitcoin or ban it. Regulation affects its assessment as new regulations provide a sense of security for new investors who then enter the market for fear of missing an opportunity.
Similarly, when regulators issue general bans on the cryptocurrency industry, Bitcoin’s price and valuation are affected by market panic and sell their positions.
Everything leads to supply and demand
As with many assets, Bitcoin’s value comes down to supply and demand. As people move away from fiat systems in favor of decentralized cryptocurrencies, the demand and valuation of bitcoin will increase.
The supply remains limited due to strict protocol conditions governing how many bitcoins can be mined. In addition, production costs are high and increase over time, leading to fewer participating miners. Moreover, with the increasing difficulty required to mine new blocks on the blockchain, only miners with the most sophisticated equipment will be able to participate in the network.
