Wondering what determines the price of 1 bitcoin? In this article, I explain the factors that affect the price of 1 bitcoin. You will understand how bitcoin pricing works?
Bitcoin is a cryptocurrency which is best referred to as a decentralized digital currency. It is called a decentralized currency because its use is not governed by any central bank.
Neither are its operational policies crafted by any individual body. Bitcoin or BTC is transacted without need for intermediaries via a peer-to-peer network.
Founded by Satoshi Nakamoto, the unknown individual who started this revolutionary movement 11 years ago in the year 2009, BTC has become sought after by all and sundry.
The hope of many trading enthusiasts and Bitcoin owners is that Bitcoin becomes the preferred mode of exchange in the world overriding the use of fiat currencies.
There are quite some intricacies surrounding the purchase of Bitcoins because unlike buying stocks, buying Bitcoin is a different ball game since Bitcoin is not a corporation.
Bitcoin is not issued by a central bank nor backed by any government. It is not affected by the factors which affect fiat currencies such as inflation rates, economic growth measurements, and monetary policies.
The following are the factors which determine the price of 1 bitcoin:
- The cost of mining a bitcoin
- Demand and Supply
- Exchanges it trades on
- Number of competing cryptocurrencies
- Bitcoin rewards for miners
1. Cost of Mining 1 Bitcoin
Bitcoin mining is the process where users can get Bitcoin without actually paying money for it. It is done using specialized computers.
The way central banks issue out new paper currency that is how Bitcoin miners issue out new Bitcoins.
The issuance rate is in codes making it impossible to cheat the system. Miners are rewarded with Bitcoins every 10 minutes.
One advantage that comes from Bitcoin mining is that miners secure the Bitcoin network making it difficult for it to come under any malicious attack.
2. Demand and Supply
The market demand on Bitcoins and the supply of it also determines the price of 1 Bitcoin. Demand and supply refers to the quantity of a good customers want as against the producer’s ability to make it available.
In economics, demand and supply is the main model for the determination of the price of a good. It is the same phenomena at work in determining the price of 1 bitcoin.
New Bitcoins are created at fixed rates making it difficult for the excessive mining and production of Bitcoins.
Also, the number of Bitcoins that the system allows to be in circulation at any given time is 21 million. Once the number of available Bitcoins reaches 21 million, mining activities will no longer produce Bitcoins.
3. Bitcoin Exchange
Bitcoin exchange also affects the price of 1 bitcoin. A Bitcoin exchange is actually a digital marketplace for carrying out cryptocurrency related transactions.
In the stock market, investors trade over FTSE, NasDaq, NYSE and others. The market for cryptocurrency is known as Bitcoin exchange and it includes Coinbase, Luno, GDAX to mention but a few.
When an exchange becomes popular, it can begin to toll out certain restrictions to the buying and selling of cryptocurrency which often affects currency prices.
4. Competing Cryptocurrencies
Even though it currently holds the spot of the most popular digital currency in the world, Bitcoin has hundreds of other cryptocurrencies leveling up from behind.
Altcoins such as Ethereum, XRP, Litecoin, Bitcoin Cash are leading competitions against Bitcoin.
The widespread of competition is what keeps the prices down. Bitcoin, fortunately, has more visibility than other coins thereby entrenching it as the most sought after in 2020.
5. Bitcoin Reward
Bitcoin reward (often times referred to as block reward) is the number of Bitcoins given to a miner when he or she successfully mines a block of Bitcoin.
For completing blocks of verified transaction, a miner receives certain amounts of Bitcoins as a reward.
This are some of the major factors affecting the price of 1 bitcoin. There are other factors related to this discourse but the factors mentioned above are prevalent factors determining the price of 1 BTC.
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