What factors affect Bitcoin's price?
Summary: The price of cryptocurrencies is impacted by supply and demand. Here are several factors that may affect the price of Bitcoin.
Bitcoin is one of the most volatile assets. 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.
Bitcoin's current supply and rate of growth are set by code. There are a total of 21 million coins, of which more than 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. The next halving is expected to be in the first quarter of 2024.
Price shocks following Bitcoin halvings
Source: Bloomberg, Blockchain.info, as of 8/31/22
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. Liquidity is often good for price stability, however, changes in liquidity may make Bitcoin prone to price swings. Since more liquidity makes it easier to buy and sell an asset, assets with higher liquidity like Bitcoin may be more valuable to investors and traders.
Risks and investing considerations
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.
As a decentralized digital currency, Bitcoin is not pegged to the US dollar or any other fiat currency (physical money). Its price may vary from exchange to exchange.
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.