Factors Influencing the Bitcoin Price
To the untrained eye, the Bitcoin price can seem to just jump up and down at random, with no logic behind its fluctuations. In reality, its price is influenced by a number of competing factors, each one pushing the price upwards or downwards.
1. The Media
The media probably has the most direct and immediate influence over where the Bitcoin price goes. One good news story can cause a sudden price jump or even a bubble. For example, the 2017 Bitcoin price explosion, and then eventual recession, was largely down to media hype. The fact that anyone can invest in Bitcoin means that most investors aren’t too knowledgeable or experienced in trading. When the news starts praising Bitcoin as a great investment, millions around the world jump on the bandwagon and start buying without doing the necessary research.
This works the opposite way too. When a negative story starts circulating the mainstream media channels, those same new investors get scared. When they get scared, they start selling, and when many people start selling at once, the price plummets. Negative stories about Bitcoin are common, so the volatility is endless.
3. Technical problems
Technical problems have a different effect. When the blockchain technology underlying Bitcoin fails to deliver on its promises, people lose faith. The most famous example of this is Bitcoin’s current inability to scale to support the number of transactions needed. This raises the price of Bitcoin transactions to unsustainable levels and delays transactions, sometimes for days.
When these technical problems start affecting Bitcoin’s usability, it can cancel out any optimism generated by positive media stories or inspiring words for key influencers.
The Rest of the Crypto Market
Bitcoin is the centerpiece of a much larger cryptocurrency market. All of these cryptocurrencies, or altcoins, have their own market value, but they are usually highly correlated with one another. Especially the main cryptocurrencies. Big wins or losses in the Ethereum price will usually affect Bitcoin in some way.
Sometimes these can be complementary, maybe the popularity of a new Ethereum application rises public interest in cryptocurrency in general and boosts Bitcoin too. It can also go the other way. A technological breakthrough that gives another cryptocurrency an edge over Bitcoin could put a dent in the Bitcoin price as investors choose another currency over Bitcoin.
Another huge factor for Bitcoin is regulation. As a brand new technology and idea, there has been almost no legal framework surrounding cryptocurrencies over the last decade. That’s all starting to shift now. As the total market capitalization has moved into the hundreds of billions, regulators are starting to take Bitcoin seriously and draft laws around how it can be used.
Cryptocurrency regulation is now a hugely popular topic around the world. The changes that hit the price the hardest are the ones from the biggest Bitcoin markets: Japan, the United States, Europe, China, and South Korea. News of new Bitcoin regulation can push the price in either direction. Governments making moves to protect Bitcoin traders and make Bitcoin trading safer, in the long run, can have a positive impact. On the other hand, restrictions, for example, outright bans by entire countries can have a negative impact.
Nobody really knows for sure, but that lack of regulation means the Bitcoin price is susceptible to manipulation. Market manipulation can come in all sorts of forms. The cryptocurrency market capitalization is still very small compared to other markets, including the stock and FOREX markets. A small number of people and organizations own much of the total Bitcoins in circulation. They can use this as leverage, quickly drive the price up or down to their advantage, often at the expense of everyone else.
Suspicions over unethical behavior in the Bitcoin market were legitimized when the US Justice Department opened up an official investigation into illicit trading on the Bitcoin market.
Large-scale hacks of companies and exchanges can also deliver shocks to the Bitcoin price. Many exchanges have been hacked over the last few years. At times, hundreds of millions of dollars worth of Bitcoin are stolen. This causes uncertainty in the Bitcoin community, which inevitably leads to a price drop. There’s also the double whammy of the hackers wanting to cash in their bounty. Millions of dollars worth of stolen Bitcoins suddenly enter the market, which can cause the price to drop even further.
Bitcoin is a completely different type of currency when compared to fiat currencies like the US dollar or Japanese Yen. That’s the reason it’s become so popular. The Bitcoin network isn’t controlled by any organization or government and isn’t backed by any country. This makes it a great alternative currency when confidence in fiat is waning.
In this regard, Bitcoin can be a hedge against fiat currency risks such as inflation. Especially with hyperinflation in places like Latin America. When confidence in fiat currencies starts to shake, the Bitcoin price often benefits.
Adding Them All Up
The combination of all these factors plus more give us the volatile swings of the Bitcoin price. It’s impossible to add all these together to perfectly predict the Bitcoin price. Surprises, new developments happen all the time with Bitcoin. But having a good understanding of the fundamental forces pushing the price up and down can give you a cooler head in a hot market.