Buying Bitcoins and buying stocks is not one and the same thing. Bitcoins are neither issued nor controlled by governments and banks. This is why inflation, monetary policies, and parameters of economic growth that impact values of regular currencies will not affect the value of the Bitcoin. Instead, there are some other factors that determine the price of 1 Bitcoin:
- When countries have no fixed exchange rate, they can control the amount of currency circulating by tweaking discount rates and changing reserve requirement. Since these options are available, central banks can affect currency exchange rates. Bitcoin supply is impacted by two things; namely the protocol that lets new Bitcoins be generated at fixed rates and by the system that decides how many Bitcoins can exist. According to the Bitcoin protocol, new coins can be produced via mining but the rate slows down as mining becomes more difficult. Since block rewards are halved, Bitcoin circulation slows down. Secondly, the total number of Bitcoins can be 21 million and no more. So, when the number is reached, there will not be any more Bitcoin mining. It is estimated that the final Bitcoin will be mined in 2140.
- Although Bitcoin was the first of its kind, many crypto coins have followed suit and challenged its supremacy. It may still be highest in terms of market cap but has close competitors like Bitcoin Cash, Litecoin, Ether, etc. This widespread competition works to the investors’ benefit since prices are kept down.
- Bitcoins may be virtual coins but they entail a cost of production in the form of electricity costs for mining. Mining is an energy-intensive process requiring specialized hardware and lot of power. The more the numbers of miners, the more difficult the cryptographic puzzles become. And automatically the demand for electricity also goes up. So, Bitcoin’s price will invariably be related to this cost.
- Similar to equity investors who trade stocks across multiple exchanges; crypto investors also use multiple platforms for trading crypto pairs. When an exchange becomes popular, it attracts more users and may even establish rules to govern the manner in which new currencies can be added. If Bitcoins are traded on an exchange it indicates a level of compliance. Visit https://kryptoszene.de/bitcoin-robot/immediate-edge/ to know how bitcoins are traded using automated trading apps.
- Cryptocurrencies may have risen to popularity but there is a debate on how to classify them. The SEC considers them securities while the CFTC holds Bitcoins as commodity. The controversy over which regulator is going to make rules for cryptocurrencies leads to uncertainty. The market has also seen many new financial products being launched using Bitcoin as asset, like futures. This ensures that Bitcoins can be accessible to investors who are not able to buy Bitcoins and can help to lessen volatility by letting investors who think that futures are undervalued to use their resources for making bets that prices will reverse.
- Since Bitcoins are not issued by centralized banks or governments they depend on miners to keep the blockchain intact. So, all changes to software are driven by agreement and this can be frustrating as it takes long. So, scalability is an issue for Bitcoins and the software can only process three transactions every second. This slow speed is likely to push investors to other crypto coins.
- Finally Bitcoin halving will impact its value. It has a finite supply unlike traditional currencies and every 4 years, the reward gets halved. This also impacts mining as hash rate decreases. The hash rate seems to have stabilized last year and this is a positive development.