Factors Impacting Bitcoin Pricing
Pricing Bitcoin is more tricky than traditional financial instruments like equities (stocks) and debt (bonds). Bitcoin is a decentralized digital asset independent of any government or company. Traditional rules of fiscal and monetary policy from the federal reserve, U.S. government don’t apply to Bitcoin Pricing. Because Bitcoin operates independently there are no corporate filings containing balance sheets, income statements, cash flow sheets, or Form 10-Ks containing financial to use as a measurement. Contrarily, Bitcoin prices are influenced by the following factors:
- Total supply of Bitcoin and market demand of it
- Cost of producing (mining) Bitcoin
- Rewards issued to Bitcoin miners verrifying blockchain transactions
- Supply and demand of competing cryptocurrencies
- Regulations imposed by world governments
- Price action on exchanges it’s listed on
- Valuing Bitcoin is different than that of a stock or bond because it’s not a corporation. There are no traditional financial statements of balance sheets, income statements, and cash flow sheets, or form 10-Ks to review.
- Bitcoin Pricing differs from traditional fiat currency because it is not issued by a central bank or backed by faith of a sovereign government. Because of this, both monetary and fiscal policy, inflation, and economic growth measures typically impacting currency value do not apply to Bitcoin.
- Price of Bitcoin is affected by factors such as: overall bitcoin supply and demand for it, other competing cryptocurrencies, as well as the price action of exchanges it trades on.
Supply and Demand
Countries that don’t have fixed foreign exchange rates are partially able to control their currency supply with tools such as adjusting the discount rate, modifying reserve requirements, and also participating in open-market operations. These options allow a central bank to influence a currency’s exchange rate.
Bitcoin’s supply is impacted in two ways. First of which is the Bitcoin protocol itself which allows news Bitcoins to be made at a certain rate. When miners process transaction blocks new Bitcoins are introduced into the market. Over time the difficulty of unlocking new blocks increases and growth slows becoming increasingly hard over time. This slowing circulation is due to the halving of block rewards offered to the miners. The second way is the supply of Bitcoin is capped overall at 21 million Bitcoins by the creator(s)? of Bitcoin itself. No more than this number of Bitcoin can ever be created/mined. To date 18.584 Million have been extracted thus far as of December 29 2020. To give you an idea of just how much mining difficulty increases the last Bitcoin will not be mined until the year 2140. So over 100 years to mine the last 2 and a half million Bitcoin compared to roughly 11 years to mine the first 18 and a half million.
Bitcoin is the original, most well known, and largest cryptocurrency. There are countless others attempting to dethrone Bitcoin’s top position. Ether (ETH) is an interesting worthy altcoin in second place, however most other cryptocurrencies have nowhere near the prominence and clout that Bitcoin enjoys. A few other altcoins are interesting and worth looking into, Litecoin, EOS, Monero, ZCash, ETH, NEM, are on my radar. Most altcoins are pure garbage and should be avoided unless you have money to burn and gamble. Look at the ICO craze recently, pure garbage, avoid these fly by night fads.
Cost of Production
Bitcoins while virtual are nonetheless produced products that have a tangible production cost – electricity consumption being the most important factor. Bitcoin extraction, relies on a complex math problem that all miners compete to solve – the first one to do so is rewarded with a block of Bitcoins along with any transaction fees that have been accumulated since the last block was unlocked.
Availability on Currency Exchanges
Just as traditional financial instruments trade over exchanges such as the NYSE, NASDAQ, London Stock Exchange, and Japan Exchange Group, so do cryptocurrencies on their respective exchanges. Prominent cryptocoin exchanges include Coinbase, Binance, Kraken, and Gemini. Just like their traditional counterparts cryptocurrency exchange platforms let users trade cryptocurrency pairings (e.g. BTC/USD or ETH/BTC). The more popular an exchange becomes the easier it is to gain traction in the form of additional participants creating a network effect. As Bitcoin and subsequent cryptocurrencies gain market clout and draw users a level of regulatory compliance enters the mix.
Regulations and Legal Matters
The meteoric rise in the size of the cryptocurrency market has come with some growing pains. Regulators have scrambled to figure out how to define and classify the new digital asset market. The IRS treats the taxation of Bitcoin similar to that of property. Other U.S. regulatory bodies have different definitions of Bitcoin ranging from that of a security to a commodity. Further conflicting definitions and arise amongst world governments in the treatment of definition of cryptocurrency.
Furthermore the market continues to see new financial products such as derivatives that use Bitcoin as an underlying asset, such as exchange traded funds, futures, decentralized finance (DeFi) and other such instruments.
This can impact Bitcoin pricing in two ways. It provides Bitcoin access to investors who cannot afford to purchase an actual Bitcoin, increasing demand. The second way this impacts Bitcoin pricing is by allowing institutional investors who want to make directional bets on whether Bitcoin is over or undervalued the means to do so, allowing them to make sizable claims on the movement of Bitcoin in the future.
Should You Invest in Bitcoin?
I have been a proponent in Bitcoin since I learned of it. I continue to be an advocate of Bitcoin to this day. The existence of this site seeks to educate it’s user base on the utility of Bitcoin and related services built around it. We remain bullish on the future of Bitcoin both in terms of it’s price pegged to traditional fiat as well as it’s utility to provide value in various financial issues.