What causes the Bitcoin price's ups and downs?
It's highly doubtful that anyone has been left with the impression that Bitcoin isn't a thing. Whether you actively invest or just overhear a piece of news over the media, one thing is certain—Bitcoin's value dynamics firmly states the importance and mass effect of the cryptocurrency.
Ever since its initial release in 2009, Bitcoin has faced several spikes and crashes throughout the years. So, what's the single catalyst that lies beneath and causes drastic changes of money's value, whether it's fiat or crypto? Trust, essentially. Put simply, things exist because people use them. If many of them have trust in an idea, an object, a solution, an improvement of some sort, a new type of medium exchange—the chances of it sticking around for a long time and being successful are high.
So what causes Bitcoin's surges and crashes?
During its first years, Bitcoin's worth wasn't something which would have held your attention for too long. Starting in 2009, the cryptocurrency's unit price was only 0.01$. During the next few years, considerable ups and downs were registered as the world of Bitcoin has ever been truly dynamic and having you on the edge of your seat. But what are the major factors which make a great impact on Bitcoin's price and the trust in its idea?
The peak is inevitable when…
People's demand grows, but the supply is limited
The price of an asset, good or service, as economics has taught us, is dictated by demand and supply.
Demand-wise, the network effect played a role in Bitcoin's price development. As time passed, more and more people became involved with crypto, which drew the attention of those that did not want to miss jumping on the Bitcoin bandwagon and the alleged profits from trading and HODLing. And naturally, putting all other factors aside, the more something is sought for, the higher its price grows.
On the supply side, the number of Bitcoins is slowly growing and is capped at 21 million. This marks Bitcoin's deflationary character and gives it a huge advantage compared to fiat money, which is subject to continuous printing by the governments and banks all over the world. That is why your euros and dollars are worth less and less every year because of inflation. With an increased demand and limited supply, you can expect your Bitcoins' value to grow.
There's disturbance in the world of politics
Each time there is a conflict on the global political arena, the price of Bitcoin is affected positively. Why? Because political problems imply lack of stability and reliability. Same goes for bank crisis of any sort—each time a financial crisis strikes, as we witnessed with the Cypriot financial crash for example, people's trust in fiat money goes down. Then everyone is far more willing to give cryptocurrency a shot and go deep.
Media plays a huge part in people's perception of crypto. Every positive review or inspiring story about real-world application, adoption and huge profits that goes viral is affecting everyone's idea of Bitcoin. With media coverage comes information and with information comes trust and success.
When startups began launching Initial Coin Offerings (ICOs) and people could participate by investing Bitcoins or Ethereum, this boosted Bitcoin's price to a whole other level. Why? Because you simply had to buy Bitcoin first to invest it in a particular ICO of your choice. As many people started buying Bitcoins, their worth hit high.
Acknowledgment by a high-developed country
Each time a high-developed country, e.g. Japan, adds Bitcoin to the official ways of money exchange and transactions, it strengthens people's trust even more. Imagine having your country accept every Bitcoin transaction as valid—wouldn't you invest in crypto as much as you can afford to have this appealing thought that your money is far beyond any government and bank regulations and restrictions?
But what about the lows?
Bitcoin has witnessed several crashes throughout the years as well. What caused the decrease in trust?
Each time a hackers' attack occurs, it undermines the reliability of the cryptocurrency in people's minds. People are preoccupied with the idea of having their money and personal belongings somewhere safe and sound—that's why a security breach of any sort regarding the Bitcoin system raises concerns and could lead to people's withdrawal. This is essentially what happened when hackers attacked Mt. Gox and stole a huge amount of coins. The value dropped immediately.
Negative media reviews
Each bad review heavily covered by reputable media outlets also has a negative impact, since many of us count on reliable sources of information. If a piece of news criticizes Bitcoin, people's trust in the cryptocurrency will drop and so will the price of the token itself.
Even though forks are meant to distribute stability, reliability and improvement in the Bitcoin network, each implementation, whether it's of a hard or a soft fork, creates disturbance among the customers and the investors. Sure, it takes time for an update to gain ground. But until then, the changes almost always affect the price of Bitcoin negatively—at least until everything settles down in time.
Restrictions imposed by a high-developed country
When the Chinese, Indian and South Korean governments restricted the trading and use of Bitcoin, its price went down. These restrictions make the citizens of the respective countries considerably reluctant to buy and thus the demand goes down; moreover, the cryptocurrencies and the concept behind them more or less gets discredited.
So can a prognosis be given?
It's more than clear that Bitcoin's value path is really dynamic and complex. If you're interested in a more detailed picture of the events that have affected Bitcoin's price over the years, whether positively or negatively, stay tuned for our next article, in which we will illuminate everything important that happened in the last decade.
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