Factors that affect Bitcoin's price

E*TRADE Securities

12/01/21

Summary: The price of cryptocurrencies is impacted by supply and demand. Below we look at several factors that may affect the price of Bitcoin.

Bitcoin has garnered considerable media attention and interest from the public, in part due to its meteoric rise in price, which went from around $1,000 in 2017 to over $60,000 in early 2021—before falling to less than $30,000 a few months later.

Because its extreme volatility carries the potential for high reward as well as very high risk, it's worth investigating some of the factors that may influence Bitcoin's price.

Limited supply

Bitcoin's current supply and rate of growth are set by code. There are a total of 21 million coins, of which almost 90% have already been mined.

Every four years, the rate at which bitcoins are produced is cut in half (an event called the “halving”). As fewer coins are available to mine, the expense and time it takes to produce them increases. Similar to supply shocks in commodity markets such as oil or gold, a decline in annual production of bitcoin may affect its price. In its short history, there have been three bitcoin halvings, and each has been followed by a price spike and a collapse.

Price shocks following Bitcoin "halvings"

 

Bond ratings from lowest risk to highest risk

Source: Bloomberg, Blockchain.info, as of 8/31/21


Speculation

Bitcoin’s price fluctuates wildly—sometimes by several thousand dollars in a single day—which can encourage speculation and inflate demand.

Media attention can further fuel speculation and churn up volatility. Generally, negative press may lead to panic-selling by some bitcoin owners, which drives the price down. The inverse is also true, positive news tends to jolt the price.

Accessibility and liquidity

The more people who use Bitcoin, the more valuable it may become. As use cases for Bitcoin are announced (for instance, a new platform says they will accept it as method of payment), its price has tended to rise. Some market participants, including exchanges, have created or are in the process of creating investment products based on Bitcoin, such as futures and mutual funds, making it accessible to a broader investor base.

Bitcoin is considered the most liquid cryptocurrency—typically, it can be easily bought and sold on exchanges and converted to and from cash. Generally speaking, liquidity is good for price stability, however, changes in liquidity may make Bitcoin prone to price swings.

Risks

Other risks may affect supply and demand and ultimately influence Bitcoin’s price. Given its digital nature, Bitcoin is particularly prone to cyberattacks. Individual holders as well as entire exchanges have been hacked, which can create instability in Bitcoin’s price.

Legal regulations are also a consideration. Some countries have banned the buying, owning, or trading of cryptocurrency, others are threatening to enact prohibitive regulation, and still others are cautiously accepting it. Laws may be passed, nationally and internationally, that could affect taxes, ownership, and liquidity.

Investing considerations

Investors in this space should proceed with caution, understanding that the price of Bitcoin is exceptionally volatile, and its future value may hinge heavily on broader public adoption.

Investors should educate themselves and consider how and if exposure to cryptocurrency aligns with individual goals, timelines, and risk tolerance.

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