Key factors influencing the price of Bitcoin

Bitcoin, which appeared in 2009 thanks to the development of the anonymous creator under the pseudonym Satoshi Nakamoto, represents a unique form of digital currency. Unlike traditional currencies, Bitcoin is not controlled by central banks or governments. This makes determining its value a challenging task, however, Bitcoin has a market price that is subject to fluctuations.

To make informed investment decisions, it is important to understand what factors influence the price of Bitcoin. Let's consider five key aspects that shape the value of this cryptocurrency.

Balance of Supply and Demand

This fundamental factor underlies all others. When supply exceeds demand, prices fall, and vice versa. Similar market forces act on traditional currencies, commodities, and securities.

Interest in Bitcoin from companies and private investors is constantly growing, which shapes its real market value. However, the digital currency still suffers from high volatility. Even at the peak of its popularity, it was difficult to accurately determine what exactly shapes the value of BTC and whether it has intrinsic value.

In fact, the value of Bitcoin is determined by market dynamics, the balance of supply and demand, with no individual or organization able to unilaterally influence its price. Bitcoin is traded on multiple exchanges, and although its price may vary slightly across different platforms, these differences are quickly smoothed out by arbitrage operations.

The Impact of Regulation

Although cryptocurrencies technically operate outside the realm of government regulation, their prices and transaction volumes are significantly influenced by news about regulatory changes.

The degree of influence depends on the specific category of regulation:

• News about cryptocurrency bans
• Information on control under securities legislation ( has the most negative impact )
• Messages about measures against money laundering and terrorist financing
• News about restrictions on cryptocurrency interaction with regulated markets

Information about the creation of legal frameworks adapted to cryptocurrencies is often accompanied by significant market growth. This indicates that crypto markets are to some extent dependent on the activities of regulated financial institutions. There is also noticeable segmentation of these markets by jurisdictions.

Competitive Environment

Although Bitcoin remains the first and most well-known cryptocurrency, it faces competition from thousands of other coins and tokens. As of 2023, BTC maintains its leading position in the market, however, its dominance is gradually declining: while in 2017, Bitcoin accounted for 80% of the market capitalization of the entire cryptocurrency market, this figure has now decreased to 37%.

The main reason for this decline was the increasing popularity and functionality of alternative coins (altcoins). For example, thanks to the development of the decentralized finance sector (DeFi), Ethereum has become a much more serious competitor to Bitcoin than before. Currently, Ethereum accounts for about 19% of the total market capitalization of cryptocurrencies. Other coins that are also reclaiming market share from BTC include USDT, USDC, BNB, and XRP.

Cost of Production

Production costs are always included in the price of any product, and Bitcoin is no exception.

New coins are created through the mining process. The cost includes fixed expenses for equipment and electricity, without which mining is impossible. The volume of these costs depends on the difficulty of the algorithm. The difficulty is automatically adjusted approximately every two weeks to ensure that the time to create a block always aims for 10 minutes. If blocks are created faster, the difficulty increases, and vice versa.

Accordingly, the more complex the algorithm, the more computational resources are required to solve the hash and create a block. This establishes a certain minimum cost for BTC, which is constantly changing.

Influence of Trading Platforms

As mentioned earlier, the price of Bitcoin can vary depending on the exchange on which it is traded. For example, as of 9:40 AM (MSK) on January 12, 2023, the price of BTC ranged from $18 054 to $18 221 across different platforms.

This is due to several factors. Firstly, the liquidity of the exchange. On large platforms, the trading volume of Bitcoin is enormous, while on smaller ones it is significantly lower. The difference in the volume of supply affects the price. Secondly, the price is formed exclusively based on trading operations and does not have a single standard. On lesser-known exchanges with low liquidity, the price can differ significantly in either direction. The situation is equalized through arbitrage, when traders profit from the price differences between platforms, leading to a rapid smoothing of discrepancies.