CEX.IO News Education

What Factors Control the Price of the Bitcoin?

, May 8, 2014

There are plenty of different factors that go into the price of the bitcoin at any one point in time, but all of these different variables can be summed up in nothing more than supply and demand. The bitcoin is the ultimate version of a free market because there is nothing tying the value of the world’s first major cryptocurrency to a specific price point. The market determines the price of a single bitcoin, and the Bitcoin market is subject to the same fear and panic that is usually seen in any other market in human history. So what is driving the price of the bitcoin today?

Bitcoin is a Network

At this point in time, the network effect is driving the price of bitcoins more than anything else. As people join the network, the price increases. When people decide to leave the network, the price declines. There are many different value propositions for Bitcoin as a payment system, but someone has to buy into the entire Bitcoin ecosystem, including the currency, for the value of bitcoins to rise. People who believe in many of the philosophical underpinnings of Bitcoin are still what drive the currency’s value more than anything else because we have not reached the point where certain applications built on top of the Bitcoin network will require bitcoins as payment. There are many different currency networks around the world, and Bitcoin is a new option for people who don’t like the idea of fiat currency, believe in the right to financial privacy, or simply enjoy all of the various benefits of the frictionless Bitcoin economy.

Regulatory Uncertainty

When determining what drives the price of a bitcoin, it’s also important to take a look at what drives the volatility of the digital currency. The massive swings in the real value of the bitcoin are no secret, but there is definitely a trend when it comes to what is causing these large movements in the value of a bitcoin in a short period of time. Regulatory uncertainty seems to be at the core of the bitcoin’s volatility, so we can expect that volatility to die down once various nations around the world have issued clear guidelines on the currency without a country. If you look at most of the tremendous swings in the bitcoin price over the past few months, they are almost always caused by news out of China about how Bitcoin is going to be banned or how banks are not allowed to work with Bitcoin exchanges. This sort of thing is only a temporary phenomenon, and the bitcoin should have a chance to gain a relatively stable price once all of the regulatory uncertainty is gone.

Normal Growth for a New Technology

At this point in time, it would be more correct to call the bitcoin a commodity instead of a currency. Until the bitcoin can prove itself as a stable store of value, it is really nothing more than a commodity that allows one to transfer value across the globe in a matter of seconds. When you look at the growth of Bitcoin as a network over the past few years, it’s analogous to the sort of growth curves that were seen in the early days of popular tech companies, such as Facebook. This kind of growth curve is perfectly normal in a new technology, and it wouldn’t be completely incorrect to refer to bitcoins as stock in the Bitcoin payment “company”. The price of a single bitcoin needs to go much higher before it can become stable because it does not take too much money to throw the price in one direction or the other right now. Once the bitcoin has all of its current properties in addition to a stable value, there is no limit on how large the network could grow.



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