WHAT AFFECTS THE BITCOIN PRICE?
WHAT AFFECTS THE BITCOIN PRICE?
The Bitcoin price is the monetary cost of a bitcoin. The term “price”, as used here, is not to be confused with “value“ which is a perceived regard for Bitcoin’s benefits and usefulness. The Bitcoin price is expressed as an exchange rate in relation to another currency. So, for example, the Bitcoin-to-Dollar exchange rate may be $1,750 for one bitcoin, written as $1,750 BTC/USD.
By design, a total of 21 million Bitcoins will be created over 100 years according to a logarithmic release function. At the time of writing, just over 13 million bitcoins are in circulation, meaning that an additional 8 million bitcoins will be mined over the next 95 years. Given this timescale and the decelerating rate of increase of the coinbase, the supply of bitcoin can, for practical purposes, be assumed to be constant.
The Many Functions of Bitcoin
Bitcoin has many functions and uses, but we will only consider those that are salient to price fluctuations:
• Bitcoin Payment Network – Bitcoin as a currency
• Bitcoin Storage and Transfer – Bitcoin as a store of wealth and medium of value transmission
• Bitcoin Exchange Rate – Bitcoin as a market instrument and commodity
Bitcoin Payment network
Bitcoins are transacted on an ongoing basis and around the clock. At the time of writing an average of 62,000 Bitcoin transactions are conducted daily with an average volume of $50mil per day.
Of course, transactions over the Bitcoin network do not directly affect the market price of Bitcoin. In the sense that an active Bitcoin network reflects a healthy protocol enjoying plenty of usage and demand, there is an indirect influence. Only where bitcoins interface with other currencies – at exchanges – is there a direct impact on the price of Bitcoin.
Buying Bitcoin
Every bitcoin exchange transaction that involves the purchasing of bitcoin via another currency, whether fiat or cryptocurrency, has the effect of pushing the bitcoin price up. Because the bitcoins are changing hands – from the exchange’s wallet to the buyer’s wallet – there is an accompanying Bitcoin network transaction. However, it is the exchange transaction that counts toward an uptick in the Bitcoin exchange rate.
Selling Bitcoin
Every exchange transaction that involves the selling of bitcoin, i.e. exchanging for fiat or another cryptocurrency causes a downtick in the price of Bitcoin. Let us consider the last example listed above, namely usage of the Bitcoin network as a means of money transmission.
Someone working in the US, and paid in US Dollars, wants to send money to their family in Zambia. Instead of using the illustrious Western Union, they opt for the Bitcoin payment network. No queues, no forms to fill in, no proverbial rubber gloves, and no extortionate fee. They purchase bitcoin via an exchange that offers BTC/USD, send the bitcoins to a relative’s Bitcoin address, and 30 minutes later the relative in Zambia redeems some (or all) of the bitcoin for Kwacha via a local exchange offering BTC/ZMK.
The original bitcoin purchase would have caused an uptick (no matter how small) in the BTC/USDexchange rate. Half an hour later, the redemption sale via a Zambian exchange would cause a downtick in the BTC/ZMK exchange rate.
The above example also serves to illustrate the effect of money flow that causes some currencies to increase at the expense of others. Here are some more routine bitcoin sales that put a downward pressure on the Bitcoin exchange price:
• Merchants who accept Bitcoin
• Miners “cashing out” to pay bills and expenses with fiat
• Redemption of transmission bitcoin (as discussed above)
• Partial or full conversion of bitcoin salaries to fiat
Summary
The pushes and pulls on the Bitcoin price are diverse. Some are slow but steady, like the gradually rising Supply/Demand curve for a stable bitcoin supply base. Others are violent and sentimental, such as the speculative trades that see the buying and selling of tens of thousands bitcoin via exchanges every day.
Bitcoin’s price chart shows a long-term rising average price despite the often opposing forces exerting their influence on the market. Merchants and consumers each balance the other’s predominant buying or selling tendency.
Banks and governments are for the most part reacting inappropriately to the Bitcoin disruption. Some are embracing the innovation while others are stuck in hubris.
Some aspects of Bitcoin, such as Contracts, have not been explored and promise to add additional value, and, hence, price increases in the future.
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