Last updated on September 17th, 2015 at 12:04 am
When it comes to Bitcoin, nothing is simple. It takes a bit of a learning curve for anyone to grasp the concepts that govern the futuristic currency, but it’s possible to reach an understanding of how the Bitcoin price works, as well as the factors that cause volatility.
Like any other currency, Bitcoin’s price is defined by the supply and demand model. What makes supply and demand fluctuate becomes the real question then. However, it must be noted that price is different from value. Price is the exchange rate of Bitcoin with some other currency, while the value is perceptive and subjective to each individual.
Bitcoin differs in the sense that, like other currencies, it can’t be printed or produced indefinitely and, therefore, there is a limit to how many Bitcoins there could ever exist.
At the time of writing there are 14 million and six hundred thousand Bitcoins in circulation and it will take almost 100 to 125 years for Bitcoin to reach the 21 million market cap due to the fact that the difficulty and computational time required to mine each Bitcoin is increasing.
With the demand increasing and the supply staying constant, the Bitcoin price will eventually increase in the long-term but a question which can then be raised is “why isn’t Bitcoin’s price always going up?”. The answer is simple: because the demand is not always going up. The demand of Bitcoin is constantly affected by many factors, some of them discussed below.
Bitcoin transactions are one of those factors. These transactions show a healthy relation between cryptocurrency’s supply and demand. In Bitcoin’s case, there is a volume of almost $50 million being transacted each day, which is quite positive.
However, the problem arises when a number of these transactions are actually directed towards exchanges where the currency is being sold and exchanged for another fiat currency or cryptocurrency. This, in result shows, that the demand is decreasing and the price is consequently affected.
On the other hand, any transaction that is done in order to buy BTC shows an increase in demand and this pumps the price in a proportional way to the volume of Bitcoin being exchanged for fiat.
In summary, whenever there are more Bitcoins being sold than bought, the price will go down; when it’s the other way around, the price will go up.
Why are people selling Bitcoins?
The first and foremost reason is that Bitcoin adoption is far less representative than the adoption of fiat currency. This basic reason explains why people are selling their Bitcoins.
Bitcoin being used for remittances generally doesn’t help the currency in the sense that if the digital coins are being sent to someone who lives in a country with low levels of adoption, then the recipient is obviously going to get the Bitcoins exchanged right away, which will make the price go down.
Just like the above-stated example, merchants who accept Bitcoin and later on exchange it for fiat currency are generally doing it because of Bitcoin’s volatility and the inability to pay their suppliers with cryptocurrency.
Also, a large number of miners are being forced to sell their Bitcoins to pay the electricity and other technical costs needed to run a mining operation.
One can sense a pattern here. All these members of the crypto-community are only selling because they can’t use Bitcoin in the real world, to pay for things like electricity bills or to suppliers, things they can with fiat currency. Hence, the lack of Bitcoin adoption here is the major factor.
The other major reason for selling is the volatility of Bitcoin’s price. Even if adoption increases but volatility stays the same, then most people still wouldn’t want to rely on a currency that fluctuates up to 10 percent of its price on a daily basis.
Much like its price, Bitcoin’s volatility is explained and defined by different factors like, for instance, perceived value. Being a decentralized currency, Bitcoin has specific properties that are different from the characteristics of any fiat currency.
Bitcoin’s perceived value plays a major role in the fluctuation of the cryptocurrency. So, for example, if someone sees an article published by a popular news site in favor of Bitcoin, then automatically the perceived value goes up and this in result creates a predictable pattern in favor of digital money. However, if the news is somewhat critical to Bitcoin, then the perceived value will decrease and could result in the sale of Bitcoin or could refrain any user from buying more Bitcoin.
Tax laws regarding Bitcoin
Bitcoin and taxation have been a controversial topic since the very beginning, but last year an IRS announcement made the already disputed topic more of a controversy.
While the IRS recognizing the currency had a good effect on BItcoin’s price, the authority’s decision to consider it a property showed that they may plan to put on stronger regulations on the cryptocurrency and this further complicates things for people.
With a lot of banks starting to recognize the potential of blockchain and Bitcoin, the tax-related discussions may be revisited and hopefully a more reasonable proposal may be presented.
Bad press has caused much damage to Bitcoin, and the exaggeration and the extended spotlight on the recent negative Bitcoin-related events have certainly hampered the cryptocurrency adoption.
News agencies haven’t gotten enough of the stories about illegal narcotics sold on the darknet and the bankruptcy of Mt. Gox, although not all news regarding Bitcoin’s turbulent past is bad. For example, security vulnerabilities that were published did help many people in becoming more cautious of the Bitcoin scams and the insecure wallets and exchanges that exist.
Overall, we’ve come to realize that Bitcoin is here to stay and although its price may fluctuate, we have to remember that BTC is only a currency that is about seven years old. Although the sale of Bitcoin may not seem like the best choice, as the adoption increases this trend will change and the volatility will decrease with perceived value on the rise and tax laws more in favor of Bitcoin, in such a situation media would be more inclined to publish new pro-Bitcoin stories.
All of that will, however, take time and as the currency matures, new opportunities will present themselves and new solutions would be provided to deal with the ever-growing problems of our global financial world.