Since the inception of Bitcoin in 2009, its price has fluctuated dramatically, although the overall trend appears to be of increasing value. However, the cryptocurrency is still in its nascent phase and its price fluctuations are driven by many factors. Here are some of the main factors influencing the price of bitcoins:
1. The influence of the media
The media currently has an enormous amount of power over the bitcoin price. Newspaper and social media reports are able to reach billions of people. Media hype has an enormous power on the demand for bitcoins.
Positive reports cause a spike in demand leading to a price increase. Equally, negative reports encourage those in possession of the cryptocurrency to sell, resulting in a drop in price and a market crash.
2. The perceived stability of the cryptocurrency
Most people with an interest in bitcoin prices are very keen for the network to be as stable as possible so that their investment is more likely to hold or to increase in value. However, this is problematic as bitcoins are not yet widely perceived to have the same concrete value as conventional or ‘fiat’ currencies, such as pounds and dollars. If businesses decided to stop accepting bitcoins, the bitcoin bubble would burst, leading to an instant devaluation of the cryptocurrency.
3. Government regulations
When a government officially announces restrictive new regulations concerning digital currencies, for example, regarding the anonymity of transactions, prices are inevitably affected. The recent ban of ICOs in China also effected the price.
4. The impact of the number of bitcoins in circulation
It has been agreed that the number of bitcoins in circulation will never exceed 21 million. This finite supply has led some industry experts to speculate that the bitcoin prices will continue to rise over time due to the inevitable nature of demand and supply.
5. Technological innovations
Technological developments are another key factor in generating interest in the digital currency. One example is the recent integration of the currency into PayPal’s payment system, which sparked widespread interest in people who may not have otherwise considered bitcoin trading or investing in digital currencies.
6. Businesses ‘dumping’ bitcoins
Bitcoins are not widely accepted yet by many institutions. This means that many businesses use large sums of bitcoins to pay for specific expenses. This floods the market with bitcoins – a process known as ‘dumping’ and has the unfortunate effect of keeping the digital currency market in a depressed state.
7. The manipulation of the markets
The largely unregulated digital currency market is particularly prone to manipulation by traders. One tactic is to purchase vast amounts of bitcoins to make it look as if the price is increasing, and then dumping them at a later date, making a huge profit in the process. Major hacking events will also cause the prices to fall as people feel compelled to sell their coins to avoid making a loss.
Understanding these factors won’t make bitcoin trading any safer but may give you the confidence to feel comfortable about the varying bitcoin price and the knowledge to make the right decisions at the right time.