What factors determine the price of Bitcoin? Demand, production and media

Bitcoin’s decentralized nature drives it away from the traditional factors that affect other financial instruments in the macroeconomic scenario. Monetary policy, inflation rates, etc. do not affect the previous or current BTC price. Rather, Bitcoins can be compared to commodities, and it is used as a commodity to store value.

Bitcoin’s price factors are severalmainly:

• Supply
• Demand
• Production cost
• Competition
• Regulation
• Media coverage

Let’s explore these factors to see how they affect Bitcoin’s price:

Offer – The cornerstone of Bitcoin’s price

Bitcoin supply is limited. It is a deflationary currency – the total supply is set at 21 million BTC, which will be mined at a specific amount annually through an algorithm.

Since miners are the ones who produce blocks for the Bitcoin blockchain, they receive a reward in BTC. This algorithm cuts these rewards every 210,000 blocks. These are “halving events” that occur every four years.

A scarce asset is likely to command a higher price. And since Bitcoin’s supply has been reduced as we move forward it potentially helps increasing BTC’s price over time.

How Demand Affects Bitcoin’s Price

Supply and demand go hand in hand. As with all assets, if there is demand and limited supply, the price is high.

Centralized and regulated systems have high entry barriers and require an intermediary who calculates the costs of a particular transaction. Bitcoin’s accessibility and transparency have made it an attractive investment vehicle not only for retail traders and financial institutions, but for the average citizen and the unbanked.

How Production Affects Bitcoin’s Price

One of the most critical factors that determine Bitcoin’s price is the cost of production, which is divided into two factors:

1. Costs for equipment and energy consumption: to produce Bitcoins, miners need 1) mining software, most of which is free to download, and 2) mining hardware, which can be expensive depending on the mining rig, but the more expensive, the more profitable.
2. The difficulty level of the algorithm: miners must solve a mathematical puzzle to find an encrypted number. The miner who solves the puzzle wins the newly minted Bitcoins and transaction fees as a reward. Solving the puzzle is challenging since the miner requires enormous processing power and energy consumption.

Competitors – Can Alternative Cryptos Affect Bitcoin’s Price?

Bitcoin dominates the mindshare of the crypto industry, but its dominance has waned over time – 38% dominance, according to data from CoinGecko.

This is mainly attributed to the rise of decentralized finance, which has reshaped the way people do finance with a more inclusive and lucrative financial ecosystem. We now have thousands of alternatives to Bitcoin, either to compensate for certain limitations of Bitcoin (such as transaction throughput) or to bring something new to the industry. The pioneer of the DeFi movement is Ethereum — Bitcoin’s main alternative.

Ethereum is a blockchain protocol that allows developers to create decentralized applications (DApps) of all kinds and shapes on its network: GameFi, NFTs, Art, Metaverse, return-generating protocols and more. This paved the way for new economic incentives and effectively elevated the blockchain infrastructure to a new level in terms of use cases.

Likewise, we have dozens of blockchains that have carved a niche for themselves, such as Solana, Fantom or Avalanche. New coins and tokens are created daily, but they don’t offer anything new to the room. Therefore, those that can potentially take ground from Bitcoin are the top ten currencies by market capitalization, which can be found on data aggregators such as CoinGecko or Coinmarketcap.

Regulation works for and against Bitcoin’s price

Bitcoin was born a year after the 2008 crisis, causing a global recession and exposing banks’ and significant financial institutions’ lack of regulation and transparency. Bitcoin has remained unregulated and will remain so. However, government regulation plays a crucial role in Bitcoin’s price.

For example, Bitcoin – and the general crypto market – can benefit from countries that allow crypto companies to operate legally and promote cryptocurrencies as another means of investment. Or perhaps endorsing a Bitcoin-based exchange-traded fund. Countries like Australia and Canada have already approved BTC and ETH ETFs, allowing keen investors to gain exposure to crypto assets.

However, negative regulation could be, for example, a country like China cracking down on cryptocurrencies and banning its citizens from using them. Good or bad, regulation will affect Bitcoin’s price.

Effect of Media Coverage on Bitcoin’s Price

The cryptocurrency market has one of the most significant capitalizations in the world, which is why we need to have proper and immediate media coverage of the latest moves from the crypto and DeFi world. When good news is spread through social media, there is a high chance that more investors will buy BTC, pushing the price up. But of course the price will probably drop if the information is terrible.

The media objectively covers everything related to Bitcoin and other cryptocurrencies and the elements that affect the decentralized market. This is important as it will greatly affect investors’ outlook, which is a fundamental pillar affecting cryptocurrency prices. Are prices up, down or sideways? Is Bitcoin Difficulty Increasing Or Is Cardano Finally Introducing Smart Contracts? Whatever it is, investors want and need to know.

Final thoughts

As you can see, Bitcoin’s price factors are multiple and have their level of complexity. Bitcoin is still a volatile asset and regulation still does not favor the cryptocurrency industry. Until then, the factors we mentioned will continue to affect Bitcoin’s price.