Why the value of bitcoin plays by its own rules

Above: "bitcoins piles" (CC BY 2.0) by fdecomite Business News | 25 Jun, 2020 |

When Bitcoin started to enjoy its rollercoaster rise in value back in 2017, this was the moment when it went from being an obscure kind of currency to one that captured the public’s imagination. There were stories of millionaires created overnight and it seemed like the cryptocurrency was an investment opportunity too good to miss.

Since then, the price has stabilized and, while it’s unlikely to see the huge increases in value that it did three years ago, it remains a good prospect for investors. However, it’s important to understand that the influences that dictate its price changes are very different from those that govern currencies and stocks and shares.

In the case of the former, the wider economy and influences like inflation and the monetary policies of the government in question all affect a currency’s comparative worth. For shares, the performance of both the company and its sector generally are the strongest drivers of price change, again against the wider economic context.

But Bitcoin, like all cryptocurrencies, is an anomaly for a number of reasons.

Free From Interference

The first comes from one of the founding principles put forward when it was invented by the mysterious Satoshi Nakamoto back in 2008. This was that it would be free from all interference from governments and other financial institutions, making it a truly decentralized entity.

So aspects like monetary policy and the economy, in general, have no significant effect on its value: in essence, it operates within a bubble. This is also why it can be subject to such large swings in value – ones that can provide very good returns for people using a Bitcoin automated trading system. Because it’s automated it can react to these sudden shifts in value, meaning users can take a relatively passive role and still see their investment increase.

“Bitcoin on mobile phone stock trades” (CC BY-ND 2.0) by QuoteInspector.com

The Future Is Yet To Be Mined

It’s still important to understand the triggers of these price changes, one being simply that, at the heart of everything, Bitcoin is a currency that is “mined”, so there will only ever be 21 million of them produced.

Obviously, this means that supply and demand have a key role in determining its value, as does the cost, in terms of time, electricity and computing power, of creating new Bitcoin. This has been affected recently by the so-called “halving” of Bitcoin. In this, the people who mine for the currency will now earn half as many coins for their efforts. While this may be bad news for them, it may be better news for investors. This is because previous halvings have instigated periods of high volatility with the final outcome being higher values for the cryptocurrency.

Competition from other cryptocurrencies is also a factor that affects the price and with more and more being created this is becoming increasingly important. Similarly, the increasing number of competing Bitcoin exchanges is also having an effect.

It all adds up to the fact that anyone considering investing needs to have at least a basic understanding of what really determines the value of Bitcoin – and fortunately, we have just provided it.

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