26 June 2020
What Determines The Price Of Bitcoin And Ethereum?
No matter the amount you plan to invest in cryptocurrency, or the frequency with which you plan to trade, it is wise to understand what can determine the price of the cryptocurrencies you trade. This way, you can look at the various factors that affect the price of the crypto you trade, letting you predict market movements and potentially profit off of them.
A Simple Explanation – Supply And Demand
If you want to keep things simple, then the price of Bitcoin and Ethereum comes down to basic supply and demand. It depends on how much people are ready to pay for it and how much people are willing to sell it for. Both of which depend on how much is available and how strong the demand for it is.
Factors Determining the Price of Bitcoin and Ethereum
While supply and demand and the prices that people are willing to pay when buying or selling are the short version of what affects the price of Bitcoin and Ethereum, it is much more complicated than this. There are multiple factors at play, each of which influences the current price of these cryptos.
Supply and Demand
While fiat currency typically has a centralized body in charge of controlling its price by adjusting reserve requirements and participating in open-market operations, this is not the case for a decentralized currency like Bitcoin.
Instead, Bitcoin supply is impacted by mining and the maximum amount allowed.
The protocol behind Bitcoin sets a fixed rate at which new Bitcoins can be mined and enter the market. Specifically, the protocol causes the growth to slow down over time, which can potentially increase the price if the demand remains the same or increases. Additionally, there is a cap on how many Bitcoins can exist at once; 21 million. At this point, mining will stop, and the other factors will become more critical, including the influence demand.
The mining cost is essentially the cost of producing a Bitcoin. The biggest factor in this is electricity consumption. A Bitcoin must at least be enough to pay for its production. Otherwise, miners would have no incentive to min, registering Bitcoin as irrelevant.
Even though Bitcoin is still the most popular cryptocurrency, it is far from the only one. The status of competing cryptocurrencies also affects Bitcoin’s price by offering alternatives. In other words, the competing cryptocurrencies affect the demand for Bitcoin.
This is also the case for Ethereum, which is the second most popular cryptocurrency.
The availability of Bitcoin and Ethereum on various exchanges will also influence its price. This is because increased availability can increase popularity. Additionally, when a crypto is on more exchanges, it implies that trading the cryptocurrency has some level of compliance with regulations, despite being in a legal gray area. Essentially, being on more exchanges means that a cryptocurrency is worthy of investment.
Changing regulations can also impact the price of crypto in several ways. At the most basic level, whether or not a jurisdiction allows its citizens and residents to own Bitcoin and Ethereum can dramatically impact demand. If a country changes its stance, the demand may increase or decrease significantly nearly instantly.
For example, now that regulators allow for ETFs and other derivatives of Bitcoin, this increases the access to crypto for those who could not necessarily be able to access the actual Bitcoin. This increases demand. Those derivatives can also reduce volatility, thanks to the influence of institutional investors. It is still more common to see Bitcoin derivatives than Ethereum ones, although the latter is growing in availability. As such, the availability of derivatives due to regulations currently affects Bitcoin more than Ethereum.
News And Current Affairs
Although you may not realize it at first, current events and news play a large role in the price of a cryptocurrency. This is particularly true if events cause investors to lose faith in fiat currencies. At that point, they may turn to Bitcoin or Ethereum as an alternative, increasing demand and, therefore, the price.
Of course, news related to cryptocurrency has an even more substantial impact. For example, a successful hacking attempt at a major exchange could dramatically drop the price. This would be due to decreased demand over fears regarding security.
Bitcoin prices are also influenced by various internal governance decisions, including any forks that are made.
Although the price of Bitcoin and Ethereum can come down to supply and demand, it is much more complicated. Numerous factors, from regulation, to other currencies, to the production cost, affect the price of these cryptocurrencies.