Bitcoin is a decentralized Cryptocurrency, which follows a peer-to-peer technology to get transferred from one account to another. This was first introduced in 2009 by an anonymous who was later ordained with the name, Satoshi Nakamoto. Bitcoin was mainly a medium of exchange, only present virtually. Later, in 2013, when its value peaked at $2 billion, it attracted many investors. Everyone was eager to acquire and accumulate Bitcoins.
Bitcoin follows Blockchain Technology to keep transactional data secure and devoid of tampering. Each block is encoded with a unique transaction. All the transactions together form a chain, thereby forming a ledger. Thus, the chain formation makes the data traceable, transparent, and reliable. In case anybody tries to tamper with anyone’s data, there will be discrepancies in all of them, and it will be quite evident. Hence, Blockchain Technology makes Bitcoins difficult to acquire or possess. In order to mine a single Bitcoin, the person has to solve a complex algorithm. Mining a Bitcoin is not a cakewalk.
Determinants of the price of Bitcoin
Bitcoin is not regulated by any central authority. Hence, its price is not influenced by any nation’s government or any other activities pertaining to government regulations. The price of Bitcoin is strictly dependent on its own movements and the other forms of cryptocurrencies. The market forces of an economy do not affect the value of Cryptocurrencies. The government policies do not affect the value of virtual currencies. The price of Bitcoin depends on the following factors:
- The availability of Bitcoin and whether there is a deficit in supply according to the demand
- The cost involved in mining a Bitcoin at a given point
- The rewards allotted for the miners verifying transactions to the blockchain
- The value of other cryptocurrencies in the market
- The internal governing rules
How is the Supply of Bitcoin Impacted?
There are two ways the supply of Bitcoin can be impacted.
- New Bitcoins can be created at a fixed rate. Processing a block of transactions introduces new Bitcoins into the market. However, the rate of introduction of Bitcoins gradually decreases over time. This is the intrinsic nature of the system. From a 6.9% rate of introduction to 4% in 2018, the decrease is quite evident. Under such circumstances, if there is a surge in demand for Bitcoins, there will be many willing to buy them at a high price. Thus, artificial inflation I introduced in the Cryptocurrency market.
- There is only a certain number of Bitcoin that is allowed to exist in the system. It has been decided that once 21 million Bitcoins come into circulation, decisions will be made regarding its price determination again.
How do other factors Increase the value of Bitcoin?
- Competition: Even though Bitcoin is the most prominent Cryptocurrency that there is, its value is affected by the value of other cryptocurrencies, namely Ethereum (ETH), Tether (USDT), Binance Coin (BB), and the likes. There are new cryptocurrencies continuously coming into existence in the market due to fewer entry barriers. Bitcoin has the highest visibility when compared to other cryptocurrencies. This gives it a different edge over the numerous other cryptocurrencies in the market.
- Cost of Production: Even though Bitcoins are virtual, digitized currencies, there is a cost of production involved in their existence. Mining a Bitcoin takes more strain than it meets ordinary eyes. It entails solving a complex algorithm before being able to get hold of a Bitcoin. Hence, a reward is allotted for anyone who completes it first. With an increase in the number of miners in the system, the math problem gets more difficult. Thus, the reward becomes all the more expensive. Bitcoin’s value is definitely determined by its cost of production.
- Availability on Currency Exchanges: If a particular Cryptocurrency transaction can be capitalized upon, the rules governing the crypto market can be bent. People dealing with Bitcoins seem to influence the market due to their stronghold at the given period of time.
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