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Bitcoin’s price is often a mystery. One minute, it's soaring, and the next, it’s dropping, with hardly any stability in between. So, what makes Bitcoin so volatile? Understanding what drives these price changes could help us make sense of the market and make smarter decisions going forward.
We’ll attempt to do this here — come up with an answer to this question by analyzing it.
Supply and Demand
Like any other asset, Bitcoin price usd is regulated by a simple law of economics: price is determined by the dynamics of supply and demand. In the case of Bitcoin, the supply is fixed at 21 million coins. When the limit is reached, more Bitcoin will enter the market. When Bitcoin demand starts to grow, more people and big boys understand they want to have this in their portfolio as well. Because there’s a limit to this (a total supply of 21 million), the price of Bitcoin grows.
This scarcity effect has helped to increase Bitcoin prices in the last couple of years. But also, when the demand drops or a single person with big pockets starts selling, the price of Bitcoin goes down. People also call them whales.
Market Sentiment and Public Perception
In essence, Bitcoin and crypto investors make decisions to buy or sell and sometimes not buy or sell based on the perceived future direction of price. If traders and investors feel confident, people will want more Bitcoin, and the price will go up. If they feel unsure or pessimistic, many, if not most, traders and investors sell & price goes down. Much of this is psychology and how the market responds to new information, market narratives, media narratives, and specific events. Investors who at least know the latest information may make better decisions informed by the latest information & may improve their investing strategy in Bitcoin.
Regulatory Environment
Laws surrounding Bitcoin are still rapidly developing all over the world, and the price generally reacts to whatever new regulations are being introduced. For example, if a country is looking to make Bitcoin legal tender (like El Salvador), there will usually be an increase in demand, which will push the price up. Conversely, if the government decides to regulate further or ban Bitcoin trading, then the price will generally drop.
Institutional Adoption
One of the biggest narratives out of the cryptocurrency space in the last year (and ongoing) has been the entrance of institutional investors. Hedge funds, money managers, and public companies have all made headlines by adding bitcoin to their balance sheets. By on-ramping Bitcoin in so many ways as a “legitimate” store of value, the large-scale purchase of Bitcoin surely adds to the price of the asset as well.
Likewise, if “the institutions” are buying up and allocating into Bitcoin as an inflation hedge, Bitcoin’s fundamental value will naturally go up. Likewise, the price. However, we have seen very large-scale measures on the supply side, i.e., if “the institutions” allocate massive >10% chunks of the BTC float, we will invariably see a lot of short-term price volatility. ?
Technological Developments and Upgrades
Bitcoin is based on blockchain, and any changes or movements on the fundamental building blocks of cryptocurrency can change its prices. If the changes are good (let's say a new update, which will help to make Bitcoin more fast, scalable, and power efficient), more and more investors can see these as profit-making opportunities and hence more demand for it, potentially moving the prices higher.
What is the lightning network? A cheat code to bitcoin transactions A new way to trade bitcoin and cryptocurrencies The technology must-know investors should educate themselves with.
Global Economic Conditions
Global economy — politics and economic events, such as inflation, interest rates, and overall stability, can greatly manipulate the Bitcoin price. Some may argue that Bitcoin is the “digital gold,” and due to global inflation, there are more and more institutional investors who purchasing Bitcoin for the asset’s valuation and devaluation. When the traditional finance market crashes or has been forecasted to influence, people will head towards Bitcoin, as its alternative store of value will raise its value, creating a buying spree in return.
When the proverbial going gets rough, i.e., the 2020 COVID-19 recession, recession, recession — people often look for “alternative investment.” Word of Bitcoin is heard. Although this is true, the value of Bitcoin is also impacted by established financial market developments such as interest rate changes and stock exchange indices. And here, Bitcoin is a part of the mainstream.
Mining and Halving Events
It’s impossible to separate the Bitcoin price from the way new Bitcoins are injected into the market. Mining for a new Bitcoin is resource-intensive, and over time, delivering a reward for creating new blocks is reduced in half over time through “halving events.”
Bitcoin halving happens approximately every four years, with the goal of cutting the amount of new coins entering the Bitcoin market in half. However, generally, the Bitcoin price rallies when halving occurs. A decrease in supply can be enough to counterbalance a large influx of demand, pushing the cryptocurrency’s value north. Smart investors should plan for the halves and invest accordingly.
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