Bitcoin is of the type of many cryptocurrencies available in the capital market. Launched in 2009 by an anonymous identity known as Satoshi Nakamoto, it is a computerized currency circulated in the capital market without any intermediary, authoritative body such as the bank or the government.
Unlike normal fiat currency, which the bank in the economic market introduces, bitcoin is circulated in the capital market via mining. The mining procedure involves solving a mathematical puzzle or an algorithm by making smart guesses.
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Factors That Affect The Price of Bitcoins
Because Bitcoins are not regulated or introduced by the government or the Central Bank of India, the factors such as inflation or monetary policies, which affect the value of fiat currency, do not apply to cryptocurrencies in general and Bitcoins in particular.
The factors which influence the price of Bitcoins are discussed below-
The supply of Bitcoin depends upon its supply. The lesser the supply of Bitcoin, the more will be the price and vice versa. Since its inception, the supply of Bitcoin has been inconsistent. The cryptocurrency protocols generally allow new Bitcoins to circulate in the capital market at a fixed rate. The rate is supposed to go down over the period. Every four years, in Bitcoin halving scenarios, there is a remarkable escalation in the price owing to its reduced price.
In recent years, there increased popularity of Bitcoins has been observed among the investors. The factor which influences the demand for Bitcoin is the economic scenario of the given geographical locations. The price of Bitcoin is generally higher in countries where the inflation rate is significantly higher and those with depreciated currency values. Countries having more developed media influence over the population tend to have more investors investing in Bitcoin.
Another factor that affects the demand for Bitcoin is its supply. As the common demand-supply rule, if the supply of a particular object is less, its demand will be more. The same rule applies to Bitcoins. When the supply of Bitcoin is less, its demand naturally increases.
Cost of Producing a Bitcoin
Just as the normal cost of production seems to control the price of numerous commodities, in the case of Bitcoin or other cryptocurrencies, the Marginal Cost of Production is known to play a key role.
The general cost involved for producing a bitcoin involves some fixed costs including electricity bills and infrastructural rent, with the help of which mining takes place. Mining is a process where numerous miners compete to solve a complex puzzle similar to a mathematical algorithm. The competitor that comes out with the closest solution wins a reward of an Avant grade bitcoin reward.
The varied difficulty associated with solving an algorithm that usually results in the formation of a new Bitcoin, including the direct expenses involved, affects the supply of the bitcoin. As a consequence, the overall price of Bitcoin is affected.
It is a well-known fact that Bitcoin is the most popular of all the cryptocurrencies available in the capital market. After the growing success of Bitcoin, a diverse number of alternatives, such as Ethereum, Litecoin, Cardano, etc., have started to gain their foot in the capital market. Owing to this popularity and awareness of people about cryptocurrencies, a surge in the price of Bitcoins has been observed.
Rules and regulations
Due to the growing popularity of cryptocurrencies in general and Bitcoin in particular, many regulatory bodies are trying to define these digitized currencies properly. It is to be noted that if the rules and regulations become too authoritarian, it is natural for these cryptocurrencies to fall.
The factors mentioned above play a significant role in influencing the price of Bitcoin. Though in recent years, Bitcoin has proved to be a lucrative investment option in digital currency, one should, however, be very careful while investing as a certain amount of risk is always associated with the gains that the cryptocurrency promises.
When planning to invest in Bitcoins or other cryptocurrencies, in such cases, at first, you should do the required amount of research, and then come to the investment part.