What Determines Bitcoin’s Price?

Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy tools, inflation rates, and economic growth measurements that typically influence the value of a currency do not apply to bitcoin. Bitcoin acts as more of a commodity being used to store value, so the following factors influence its price: ° The supply of bitcoin and the market’s demand for it ° The cost of producing a bitcoin through the mining process ° The number of competing cryptocurrencies ° Regulations governing its sale and use Media and news Effects of Supply on Bitcoin's Price The supply of an asset plays a vital role in determining its price. A scarce asset is likelier to have high prices, whereas one available in plenty will have low prices. Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be rewarded at a fixed rate, and that rate is designed to slow down over time. Bitcoin's future supply is therefore dwindling, which adds to demand. This is similar to a reduction in corn supply if harvests were to be reduced every four years until no more was harvested, and it was publicly advertised that it would happen—corn prices would skyrocket. Bitcoin's Price and Demand Bitcoin has attracted the attention of retail and institutional investors, increasing demand fueled by increased media coverage, investing "experts," and business owners touting the value bitcoin has and will have. Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular with those who use it to transfer large sums of money for illicit and illegal activities. This means that shrinkage in future supply has coupled with a surge in demand to fuel a rise in bitcoin's price. However, its price still fluctuates in alternating periods of booms and busts. For example, a run-up in bitcoin's prices in 2017 was succeeded by a prolonged low, then two sharp increases and downticks through 2021. Production Costs and Bitcoin Price Like other commodities, production costs play an essential role in determining bitcoin's price. According to some research, bitcoin's price in crypto markets is closely related to its marginal cost of production. For Bitcoin, the production cost is roughly the sum of the direct fixed costs for infrastructure and electricity required to mine the cryptocurrency and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of a network of miners competing to solve for an encrypted number—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees accumulated since the last block was found.Solving the hash to open a block and earn a reward requires brute force in the form of considerable processing power. In monetary terms, the miner will have to buy many expensive mining machines. The bitcoin-mining process also requires costly electricity bills. According to estimates, electricity consumption for the bitcoin-mining network equals more than that of some small countries. Competition and Bitcoin's Price Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for investment dollars. As of 2023, bitcoin dominates trading in cryptocurrency markets. But its dominance has waned over time. In 2017, bitcoin accounted for more than 80% of the overall market capitalization in cryptocurrency markets. By 2023, that share was down to less than 50%. Are Bitcoins a Good Investment? Bitcoin has been very volatile in its short time as an investment asset. It's best to speak to a finance and investment professional about your specific situation before investing in bitcoin. What Is Bitcoin's Current Stock Price? There isn't a bitcoin stock, but you can purchase shares of companies that invest in blockchain technology or cryptocurrency. Are Bitcoins Illegal? Bitcoins are recognized as a form of currency in many countries, but only one considers them legal tender. Outright bans exist in China, Algeria, Bangladesh, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia Is It Worth Buying $100 of Bitcoin? Bitcoin's price is volatile, so the $100 you spend on portions of a bitcoin today may not be worth $100 tomorrow or even in the next 30 minutes. However, your bitcoin may be worth more. If you're buying it as an investment, you should consult a finance and investment professional about your specific financial circumstances. The Bottom Line The combination of supply, demand, production costs, competition, regulatory developments, and the media coverage that follows influences investor outlook, which is one of the most significant factors affecting cryptocurrency prices.