What Drives Bitcoin’s Price

The following are some of the key factors driving the price of Bitcoin.

The price of Bitcoin has collapsed to around 7% to $4,387, taking its losses to almost 30% in the past week. Last December the cryptocurrency surged to an all-time high of $19,511 but fell back to $13,500 at the start of this year. All of these signs show how volatile the currency is, prompting the question, what leads to such huge movements?

Ongoing research reveals some of the critical factors that affect the price of Bitcoin. These include (1) media hype and uptake by peers, (2) political uncertainty and risk, (3) moves by governments and regulators, as well as the (4) governance of Bitcoin which includes (5) Bitcoin cash fork / civil war and (6) quantitative tightening.

(1) Media Hype and Peer Uptake

Analysis of the price of Bitcoin shows that positive media coverage could be one of the key factors driving the price. Positive media coverage and awareness of new technologies cause a well-known hype-cycle “trough of disillusionment” which follows after the hype.

This is clear during the early days of Bitcoin when the mainstream media started to report and “hyped” on the new currency and have caused price spikes as well as frequent collapses. As ongoing media coverage increases and other factors are brought in, it is harder to distill the effect of the media alone.

This is similar to what happens when a high-profile company goes public, when investors “pile in” its value rapidly increases from a low base.

2) Political Risk

Political risk around respective national currencies can also affect the price of Bitcoin as people use it to buffer against price movements for a particular currency, or when they need to quickly divert large amounts of value out a country or currency.

One concrete example is the economic crisis in Greece in 2015. It was followed by reports of increased buying of Bitcoin by Greek citizens wishing to secure their wealth. However, this didn’t affect the price of Bitcoin on global markets, which remained steady for most of that year.

However, the hysteria surrounding Brexit on June 23, 2016, did lead to a surge in the price of Bitcoin alongside a drop in the value of the British pound.

The pound started plummetting around May 2016. By July it was more than 10% below its pre-Brexit value. At that same period, the price of Bitcoin increased by over 65% (from £302 to £502).

Another example us during the election of Donald Trump as US president which was also followed by two months of steep surges in the price of Bitcoin. Many attributed this to unpredictability in the US economy.

3) Regulatory Moves

Regulators worldwide have to catch up to the rise of Bitcoin. They must decide, for instance, how the tax system will treat it, or whether and what regulation applies to its use as well.

There are two events in particular that highlight the impact regulations can have on the price.

The announcement that Bitcoin would be considered legal in Japan pushed the price of Bitcoin up by 2% in just 24 hours and skyrocketed the price globally by up to 160% for the next two months.

Another would be China’s decision to shut down several Bitcoin exchanges and ban initial coin offerings sent the price of Bitcoin dropping by 29% in just 24 hours.

4) Bitcoin’s Governance

Although Bitcoin is a decentralised currency, decisions about how it works or evolves need to be created from time to time. These may also cause price fluctuations.

5) Bitcoin cash fork / civil war.

When the software used to mine and authenticate Bitcoin transactions undergoes an update, developers need more than 50% of the global network of miners to agree with the said change. When they get that support, they can create a “fork.”

Last week, Bitcoin cash (BCH), currently the fourth-largest cryptocurrency and is one of the most prominent the dozens of different bitcoin forks, went through its own split last Thursday, November 15, 2018.

The process of “hard forking” usually takes place when miners and developers can’t agree on certain updates to the software involving a particular digital token or currency. This results in two groups, one which continues to operate under the same rules, while another branch off and generates a new blockchain with the updated software setup. In the process, a second digital currency is generated.

In the case of bitcoin cash, the “hard fork” is the result of building tensions among developers and miners within the BCH community. When BCH developer Amaury Sechet proposed an upgrade that modified the ordering of transactions on the blockchain, a faction occurred and has only become more fraught. This created a period of uncertainty and risk before the fork and a period of rapid price increase afterwards.

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(6) Quantitative Tightening

Last October 2017. U.S. central bank started unwinding of its balance sheet. The program was called “quantitative tightening” to emphasize that it was the reversal of the previous quantitative easing.

This process drains liquidity from the markets, in other words, this shows that the free money era has ended which is triggered by the pull of institutional money from their asset class. Most asset classes including cryptocurrencies incurred a loss across the market have declined merely 5% from October 2017 when the quantitative tightening started.

Although we can point to these factors has affected the price of Bitcoin over its short life, it is still a volatile and experimental technology and is still in development.

In the long run, it is likely to gain acceptance among investors for other reasons. For instance, it is deflationary — because there is a limited supply for both the total number of Bitcoins that can ever be created as well as the rate they can be created in, this will result in the purchasing power of Bitcoin to increase over time.

For other investors, the volatility of Bitcoin makes for a good trading environment. For example, there are lots of price movements which gives opportunities to make money in buying or selling.

Bitcoin is an excellent long-term investment due to it being unregulated in supply and as well as some vast benefits on most of the national currencies: it is global, untied to supply of currencies by central monetary banks, it can be easily transferred across borders, and doesn’t suffer from the considerable regulation and administration costs paid to banks, currency markets and financial traders.

Being relatively new in the market, with no mathematical mechanism in place to predict it’s performance in the future, it is required that potential buyers/investors need to take note of. Our only advice would be — don’t put in more than you can afford to lose.

Sources :Bitcoin price plunges below $4,500 mark in new 2018 low
Cryptocurrency’s value has slumped by more than a quarter in less than a weekwww.theguardian.com

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