Bitcoin and the crypto market as a whole are similar to regular stock markets. The main difference, except for modern technology use, is an extremely high volatility of cryptocurrencies. New coins may increase in value by 10%, 100%, 1000% in a few weeks or days, but then they can fall even more significantly. “Old and trusted” cryptocurrencies are more stable but still volatile. For instance, the Bitcoin price rose by 1338% in 2017 and then lost 300% in one month.
Such fluctuations are more or less typical for all cryptocurrencies. And reasons for this are similar. Being the first coin and remaining the largest one in terms of capitalization, Bitcoin is also influenced by these factors. Though, there is still the main reason which defines the price of Bitcoin. It’s about market supply and demand.
Supply and demand
As is usually the case with foreign exchanges and the world economy, prices change in the wake of market activity, which means buying and selling something. Cryptocurrencies including Bitcoin comply with this rule too. The more buyers are on the market, the higher will be the price of Bitcoin. Accordingly, the more sellers will be engaged, the lower will be the price. Simply put, high demand with low supply moves the price up, and high supply with low demand pushes it down.
Bitcoin is quite unique in this case. First of all, new coins can be created only through mining, which means people must spend their time and computing power to increase supply. The rate at which new coins are created slows down over time. Demand rates aren’t controlled by the Bitcoin network, so they can exceed the speed of mining. The result is obvious: fast demand with slow supply will lead to higher prices.
On the other hand, the total supply of Bitcoin is limited to 21 million coins. Now there are a little more than 17 million. After reaching the limit, miners will be no longer able to create new coins. Then the price will depend only on the demand. Many users say that the limited supply guarantees the long-term rising trend. That’s a mistake. There’s always a chance that Bitcoin will become obsolete, so both the demand and the price will go down.
The easiest way to spot a short-term trend is to look at the order book. It shows how much and for which price traders are willing to buy or sell cryptocurrency. Such charts can be found on each and every exchange.
The ratio between supply and demand is crucial for every tradable currency including Bitcoin. But various other factors influence the price as well. Let’s explore them to better understand the past and future changes.
News and hype
Mindset has a strong impact on almost all our decisions. This is true for trading cryptocurrencies as well. A lot of newcomers and less experienced investors prefer to rely on decisions of other participants instead of researching. News can easily move the price of Bitcoin up or down. It’s obvious that positive news increases rates and vice versa. The more significant the news is, the heavier its impact on the prices.
Hype is a unique factor triggering animal spirits of the investors and causing the demand to increase artificially without real occasions or with minimum reasons. Hype is built around major news. A few years ago, almost all pumps and dumps were caused by the media hype. But now more factors affect the price, so it’s hard to distinguish which one is making a difference. The basic rule for keeping a cool head under the hype is to make your own analysis and don’t trust only one news source.
As for government influence, the Bitcoin price is susceptible to:
1. Political effects. Cryptocurrencies are a pretty interesting alternative to fiat money. Bitcoin offers relatively fast and easy transactions which can be made without banks. The demand for Bitcoin rises after the weakening of fiat currencies. This was the case during the economic crisis in Greece or after the US government imposed sanctions against Iran.
2. Regulations. Governments all over the world have a burning desire to control crypto. There are a lot of issues, like tax regulation or official status of Bitcoin. Positive attitudes increase the popularity of coins and more people buy them. Negative or strict regulations have the opposite effect. The best example is a ban of ICOs and mining operations in
Despite the inherent nature of blockchain, cryptocurrencies can’t be totally sheltered from the interference of financial institutions and governments for now. That’s why official statements about Bitcoin have a relatively strong effect on the price of the currency.
Acceptance in real life
It’s widely known that cryptocurrencies are backed by nothing except for practical use and popularity. They differ from fiat currencies that are strongly tied to the performance of the assets like gold or oil. Coins with the innovative idea and high practical value have a better chance to survive and increase in price. Bitcoin is the first and the most famous cryptocurrency, so even after government bans and bad news, it can easily recover to high prices due to wide acceptance.
This point is more about long-term bounces, however. New crypto coins and their price fluctuations are dependent on the hype and government more than on possible use. They are also affected by market speculations, and so is Bitcoin.
Experienced traders and investors with a lot of money at stake – Bitcoin whales – can manipulate the market. The most popular scheme is called “pump-and-dump”. Initially, a group of traders invests money in Bitcoin or another coin to increase the demand. Then other players start to buy Bitcoin at a certain exchange rate pumping it even more. When the price hits its peak, the whales sell off their coins and thus decrease the value rapidly.
Speculations are more typical for newly launched coins. But sometimes whales pump-and-dump Bitcoin because of its high price and a huge ROI potential. If you are a novice investor, don’t try to ride the wave. Just hold and trade occasionally.
Bitcoin network itself
Finally, Bitcoin is based on specific technology as well as other cryptocurrencies. From time to time, this tech undergoes updates to maintain cryptocurrency and help it to survive. Successful innovations increase the coin’s value while fails lead to price crashes. The most iconic example is the Bitcoin Cash fork initiated in the wake of the Bitcoin scaling debate. Right after the hard fork, the price of Bitcoin dropped by 7% but then came back and reached new highs. Another example is a failed fork in November 2017. Then the price of Bitcoin also dropped and the price of Bitcoin Cash doubled.
The future of Bitcoin
The cryptocurrency market is still in its infancy, so nobody can predict the performance of any particular market player. Charts show that prices plunge significantly in a short term, but overall the market follows an upward trend. It doesn’t mean that the trend will continue. It can go down at any time and probably reach $0 at one point. But now both traders and investors can
get some profit by quick deals or by persistent holding. It’s up to you to decide how to deal with high volatility if so. Just remember the golden rule: don’t invest more than you can afford to lose.
Guest Post submitted by – Mary Ann Callahan