For you to understand how Bitcoin prices develop and how events influence it, you must first grasp what Bitcoin is really is.
For starters, Bitcoin is a form of digital currency that is not “printed” by any one centralized entity such as a central bank but by the network itself. They are in limited supply and because it is digital in nature, it only exist in the Bitcoin network.
Bitcoin is decentralized meaning that there are millions of computers that are plugged to the Bitcoin network through special software that allows creation of Bitcoin at regular intervals. Anyone interested can join the validation network and take part in transaction verification by committing their computing power. This computing power helps to validate and approve all form of transactions within the vast Bitcoin network.
Unlike fiat currencies which can be backed by Gold or the government, Bitcoin is not backed by anything other than trust and mathematics called proof of work that must be “shown” before compensation. This proof of work is what creates Bitcoin and the formula used is open for everyone to review or even edit because it is open source.
Bitcoin Prices Evolution
Like any other currency that is used as a form of payment, Bitcoin has its own history. It was first launched in 2009 by Satoshi. Guess what? At launch each coin was available for $0.001.
- In the years leading to the Cyprus banking crisis of 2013, nothing serious had happened to Bitcoin price wise. Fluctuations were mild but on November 2013 when the Chinese started buying these coins en mass, Bitcoin prices responded accordingly and rose to $1.
- By February 2014, prices were still mild but on an upward trajectory. However, when Mt. Gox collapsed, Bitcoin prices sunk. Matter of fact, 40% of its value was wiped. Prices continued to fall throughout 2014 and into 2015
- In mid 2015, Bitcoin popularity begun to rise as some merchants and corporations such as Microsoft began accepting them as a means of payment. Throughout 2015 and 2016, Bitcoin continued edging higher rising from less than $50 to $900.
- In 2017, Bitcoin prices exploded. Safe the few technical obstacles and government regulations such as Segwit implementation, South Korea and China ICO ban and Bitcoin Cash hardfork, Bitcoin value quickly rose from $900 in early January to $18,000 by December 2017.
From this brief history, we notice that Bitcoin is subject to the same laws of economics and reacts to fundamental events that happen around the world.
Factors that influence Bitcoin Prices
Let’s discuss some few factors that influence the price of Bitcoin over time:
The power of supply and demand: From laws of economics, the price of any item tends to rise and fall depending on demand-supply dynamics. The same applies to Bitcoin which by many definitions is considered a digital asset. When its demand shot up in November 2013, price appreciated 1000% to $1.
The fixed number of Bitcoin: Bitcoin is used as a means of payment and as such should bear some characteristics like fiat currency: That of scarcity. In the case of Bitcoin, the total number to ever circulate is pinned at 21M and right now, 84% of these coins have been release. We anticipate that as the number of Bitcoin approach 21M, its price will continue rising.
Technical or security concerns: From our example, we saw how Bitcoin prices dipped after Mt. Gox Bitcoin exchange filed for bankruptcy back in 2014 and what happened to price. The same happens when there is a technical event such as splits from the original Bitcoin core software. Prices react accordingly either by going up or down depending on if the issue will affect the cryptocurrency positively or negatively.
Fundamental events like new regulations or politics can drives prices in either direction. Chinese and South Korea regulatory order to ban ICO lead to Bitcoin losing 20% of its value because most of the ICO were funded through Bitcoin and this affected the demand for this cryptocurrency. When Japan declared that they were accepting this virtual currency as a form of payment, Bitcoin spiked.
As we can see, Bitcoin prices fluctuate just like fiat currencies in the FX market do.
However, since the industry is still young we expect the coin to temper as it ages but this depends on if more people will be on boarded to back the legitimacy of this cryptocurrency.
Bitcoin’s inherent characteristics that affect price
These are some of the inherent attributes that give Bitcoin its legitimacy and which if people trust will see Bitcoin shatter major milestones:
Bitcoin is highly divisible: it can be divided up to 8 decimal places called Satoshi point
Bitcoin is secure: the underlying technology is blockchain and once transactions are made they are immutable. Furthermore, participants remain anonymous.
Bitcoin is portable: you can transfer your Bitcoins through hardware or paper wallets.
Bitcoin value is uniform: The unit price of Bitcoin is uniform irrespective of where you are.
Bitcoin is recognizable: there is only one Bitcoin and the value can be discerned from other cryptocurrencies.