Unlike traditional investment options such as stock trading, FD, mutual funds, etc.… there is no central authority that governs the transactions that occur in cryptocurrency. Since there is no bank/government or acentral figure to oversee the transactions, the prices of cryptocurrencies do not depend on factors that generally influence regular currency – inflation rates, economic growth measurements, etc.… Then, what decides the prices of these currencies? Let us consider Bitcoin – the first-ever (and the most popular) cryptocurrency. While Bitcoin's invention is attributed to a group named Satoshi Nakamoto, nobody is aware of the faces/actual people behind it. Nevertheless, the prices are just as volatile, even in the cryptocurrency platforms. Let us see the key factors that the bitcoin price depends upon.
The
key factors behind fluctuating prices
·
Government regulations
As Bitcoin soared to unprecedented prices, governments and financial institutions started paying attention to cryptocurrencies. The absence of a central governing authority has made it difficult for governments to establish regulations. Should Bitcoin be classified as a security or commodity? The statements from governments of powerful countries affect the bitcoin price. For example, the beginning of 2018 marked several Asian governments (India, China, South Korea…) issuing cryptocurrency regulations. At that point, the price of bitcoin fell drastically in a short span of 24 hours.
·
Supply Vs. Demand
It is a universal law that the value of a product shoots up when it is in demand. There is a set number of Bitcoins that can be brought into circulation. Bitcoin miners solve complex mathematical puzzles to win Bitcoins and then introduce these into the market. However, the rate of introduction of new coins has been steadily slowing down. This can create a situation where there is a high demand for Bitcoins, but the production rate of new ones is slow when it is not enough to meet the increasing demand, the price increases.
·
International events
It
has been just over a decade since Bitcoin came into existence. In this period,
its price has been affected by political events too. When citizens are not
happy with their governments or economic instability, people turn to
cryptocurrencies rather than the regular currency. Crises, bilateral relations,
etc.… fuel the price of Bitcoin.
Some other factors include the coverage of Bitcoin by mass media, the governance within the Bitcoin community, market liquidity, technological developments, and so on… Just like other investment options, Bitcoin is also a volatile market. One must be careful while investing in Bitcoin.
0 comments: