Fiscal policies, economic growth indicators and inflation rates have no impact on the direction of Bitcoin. These factors usually affect the value of national currencies, which, unlike Bitcoin, are issued by the central bank or backed by governments. Factors that affect the value of Bitcoin include Bitcoin’s market supply compared to demand, mining costs (costs of production), regulations around the trading of Bitcoin, the number of competing altcoins, as well as media sentiments and news. 

Payment integration by big corporations

 When Tesla communicated its decision to adopt Bitcoin as a payment option, the price of the coin dramatically rose. Time and again, Tesla founder Elon Musk has demonstrated how integrating crypto-based payments can positively impact market rallies.  If companies like Amazon, Apple, and Meta begin accepting Bitcoin as a mode of payment, the price of the coin is likely to rise.

Demand and supply of Bitcoin

The forces of demand and supply play an important role in the price of any asset. The price of a scarcely available asset tends to be higher, compared to one whose availability is plenty. Bitcoin is a deflationary asset, and this is influenced by its fixed supply cap of 21,000,000 coins. Besides, the supply is also well documented on the Bitcoin whitepaper including the number of coins that will be created within any given duration. Remember, the BTC protocol allows the network to only create a fixed rate of coins, this rate is slowed down over time to make BTC deflationary. For every Bitcoin halving event, the rate of Bitcoin creation is reduced by half. Note that new coins are brought into circulation through miner rewards after each successful block time. The miner reward is cut in half during the halving event, and the previous one occurred in May 2020. This means the supply of BTC is reducing, therefore raising its demand. Every rise in demand has a proportional impact on the value of the asset in question.

Bitcoin and other cryptocurrencies have the attention of both institutional and retail investors. The growing interest is the result of increased coverage by both the media and investment experts. Currently, countries facing high inflation rates and whose currencies might have devalued are now adopting Bitcoin. An example is Venezuela. Besides, the coin has grown in demand across the remittance industry. In this sector, individuals are using Bitcoin to make huge money transfers across borders.

As you can see, these factors comprising a dwindling future supply and a growing demand will have a positive impact on the direction of BTC. However, remember the price of BTC undergoes bouts of booms and busts. E.g, when two sharp price surges and a bottom followed Bitcoin’s price in 2017.

Bitcoin Mining Costs

The cost of producing any one commodity has an essential role in influencing its value. Research shows the price of bitcoin has a close association with its marginal production cost. Take the cost of producing Bitcoin as a sum of all direct fixed costs for electricity and infrastructure and indirect costs determined by the difficulty level of mining the coin. 

Bitcoin mining comprises decentralized miners competing to solve a complex computation puzzle, through which transaction blocks are confirmed and miners get rewards for minting new coins. The winning miner takes home newly created Bitcoins and all the transaction fees in the particular block they solved. 

Indirect bitcoin mining costs are determined by the difficulty level of the BTC node algorithm. Different difficulty levels either increase or decreases the pace of Bitcoin production rate, and hence the general market supply. Miners need to solve a difficult puzzle in order to unlock a block and validate its transactions. Blocks require brute force to unlock, and this is only achieved through outrageous energy and high process power. Financially, miners need to incur the cost of purchasing expensive energy-intensive mining equipment. The miners also need to foot high electricity bills, whose consumption could go as high as the electricity consumption in small nations. 

Expansion and Recessions

When wealth is created and injected into the economy, a wealth effect takes place. This usually has a direct impact on the overall monetary system. When people create wealth through bitcoin, they inject the added value back into the ecosystem. This causes an upward positive impact on the bitcoin ecosystem. 

Global economic health is a big influencing factor in the price of a majority of assets, including bitcoin. In moments of economic expansion and prosperity, most individuals prefer to allocate their wealth to financial assets. The demand for such assets directly adds value to the prices. On the other hand, recession economic periods result in people liquidating their financial assets, hence lowering the demand for alternative assets such as bitcoin. 

Expansion and recession are macroeconomic events that inform investors on what assets to purchase. Such events shape the perspective and risk tolerance of asset investors.

Competing altcoins

Despite Bitcoin being a popular cryptocurrency, a lot of altcoins are competing for the top spot. A dominant coin attracts the attention of both institutional and retail investors. By 2017, BTC was dominating over 80% of overall crypto market capitalization. The coin’s dominance has decreased throughout time and the coin currently accounts for less than 50% of the market value. Increasing awareness of other altcoins and innovation in the blockchain industry serves as the main reasons for warning against Bitcoin’s dominance. For instance, Ethereum emerged as a programmable blockchain for developers to build and deploy smart contracts. The Ethereum ecosystem has attracted lots of interest across the building community, and hence accumulated nearly 20% of market dominance. 

There are other popular cryptocurrencies that have continued to slice Bitcoin’s market share. These include Binance Coin, USDC, Solana and Tether. However, Bitcoin still continues to attract investment despite such coins slicing part of its investment dollars. Consequently, demand and awareness of the overall crypto industry have grown.

U.S Fed interest rate hike

The U.S. Fed raised interest rates by 75 basis points in June 2022. In 28 years, the interest rates have never been increased by such a rate. This event had an effect on the price of Bitcoin. 

Usually, interest hikes are a primary indicator for the U.S. Central Bank and the Federal Reserve to curb inflation and prevent economic slow-downs. 

An increase in interest rates leads to a high cost of borrowing and therefore discourages consumers from spending and lending. The impact can also cause downward pressure on Risk-On investment assets such as bitcoin. This is because investors can now earn a good wage by only saving their money in interest accounts, which is less risky. 

Regulations and fiscal policies

Bitcoin came into existence following the 2008 – 2009 financial crises, which could have resulted from reduced regulations of the derivatives market. The crypto industry is loosely regulated and has gained reputation for being a powerful cross-border and regulation-free payment system. 

The coin’s lack of a standard regulatory framework comes with both benefits and drawbacks. Lack of regulation means the coin can operate freely in the wherever country and is not subject to government controls and sanctions. Nonetheless, the majority of governments and central banks are pushing for more regulation in order to make the crypto industry safer and more secure. 

The development of a regulatory framework will not take long. However, the impact of sound Bitcoin regulations remains unknown for the overall cryptocurrency market. For instance, the U.S. Securities and Exchanges Commission (SEC) impacts the price of Bitcoin whenever they have a ruling related to the industry. For example, the price of BTC rose to $69,000 only a few days after the commission approved the United States’ first Bitcoin-ETF, the BITO.

When China imposed a ban on all bitcoin trading and transaction in 2021, the supply and demand for crypto went down. Mining farms in the country closed business and migrated to crypto-friendly nations. As a result, cryptocurrency prices dropped with Bitcoin plummeting from $51,000 to $41,000 within a month. 

Media coverage and overall sentiments

Media and news coverage have an impact on overall Bitcoin sentiment, and hence the price. When any of the above factors take place, the media covers them and disseminates them to the public. This results in either good or bad news to BTC investors, who then tend to determine whether the price goes up or down. A mix of supply, demand, competition, regulations, production costs and media coverage determines the future outlook of investors. 

Weak Fiat Currencies

The majority of countries measure the value of goods and services through the local national currencies such as the Euro or Dollar. Whenever the national currency undergoes inflation, all products in the respective country demand more of that currency. Hence a rise in the cost of living. This effect causes a huge problem in any person’s purchasing power, especially if they are holding their wealth in an inflationary currency. 

All major economies use fiat currency. And all fiat currencies are prone to inflation. However, each individual country has their own distinct inflation rate. The key driver to any fiat’s inflation rate is the supply of that currency. More supply means less overall demand.  Bitcoin’s total supply is a hard cap of 21 million coins, which is known and predictable at the same time. This alone makes it deflationary (resistant to inflation). High inflation rates in Nigeria and turkey influenced a disproportionate demand for bitcoin in early 2021. 

Frequently Asked Questions about the price of Bitcoin

Is Bitcoin a good investment? 

Evaluate the intrinsic value of Bitcoin to determine whether BTC is a good investment. All cryptocurrencies have their value backed by their true value. It is however important to also conduct your own research and due diligence. Remember to also invest only an amount you are comfortable losing. 

Why is Bitcoin volatile? 

Increased uncertainty about Bitcoin’s true intrinsic value and its future price makes the digital asset highly volatile. There will always be a fixed number of bitcoins to ever circulate, and the amount released into circulation keeps reducing over time. Therefore, demand must always rise in order to match a steady price due to differences in supply. The crypto market is still compact relative to other sectors, and therefore media coverage alone is highly likely to drive its price up or down. For example, Tesla’s decision to accept Bitcoin as a payment method pumped the price of the coin higher. 

How is Bitcoin valued? 

Bitcoin’s price depends on the forces of supply and demand. The price drops when there are more sellers, and rises when there are more buyers than sellers. Also note that the price of Bitcoin is not dependent on a single entity, plus the coin cannot be traded within a single location. Therefore, each market or exchange sets its own price on the basis of supply and demand. 

Is Bitcoin Illegal?

Bitcoin has a loose regulatory framework. A few countries have considered it as legal tender, while some countries have placed bans on the coin. Such countries include China, Egypt, Nepal, Qatar, Morocco, Tunisia and Bangladesh.