Factors That Determine the Value of Virtual Currencies

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Most of the new items are dominated by Bitcoin trading in recent days. Although investors use bitcoin as a trading currency, they don’t involve exchanges. Bitcoin is the most volatile currency.

There are a lot of crucial factors one must be aware of while handling bitcoins. Factors influencing the bitcoin value are one such significant factor. In an era of digital transactions, anyone can possess a bitcoin currency and participate in online trading. Hence, factors influencing the bitcoin value becomes essential to anticipate and engage in wise trading decisions. This article throws significant light in this direction and discusses all crucial factors that influence the bitcoin value.

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Supply vs. demand:

Although the demand has constantly been increasing over the years for bitcoins, supply is majorly impacted by two important things. One being the bitcoin protocol, as the protocol allows new bitcoins to be mined at a fixed rate. And the second is the number of bitcoins that are allowed to exist in the system. There are currently only 21 million bitcoins, and the complexity of mining increases each time someone mines a bitcoin.

The last bitcoin cannot be made to mine till 2140. Hence, even though there is tremendous demand, the supply cannot be increased to meet the demand. This factor increases the value of bitcoin to neutralize the demand. If someday, the number of bitcoins increases to meet the demands, then the value may drop.

Competition:

Bitcoin is just one well-known cryptocurrency. Hundreds of others are waiting to be discovered and mined. Despite bitcoin being the dominant cryptocurrency, other currencies like Tether, Cardano, Ethereum, and Binance coin are the few closest competitors for Bitcoin. Competitors of bitcoin also play a vital role in setting the bar for bitcoin.

As the demand is already high in the cryptocurrency market and due to few barriers to other cryptocurrencies, traders are opting for other cryptocurrencies too. The value of any currency depends on demand. As the competitive cryptocurrencies are diversifying and dividing the demand, the price of bitcoin may fluctuate.

Regulations:

Bitcoins, or all cryptocurrencies for that matter, are not widely accepted globally in the present times. Hence, regulations play another crucial role in deciding the value of bitcoin. An acceleration in online cryptocurrency trading has prompted the regulatory bodies to pay attention to this field.

While bitcoins and other cryptocurrencies are accepted, acknowledged, approved, and legalized in a few countries, few other countries have adopted a hard stance on bitcoins and cryptocurrencies and put in place harsh regulatory mechanisms to moderate or restrict online cryptocurrency trading. Be it harsh or minimal, regulatory policies have a significant impact on bitcoin value.

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Currency exchanges:

Similar to stock exchanges, cryptocurrency trading is also done over platforms like Coinbase, Gemini, Trade station, GDAX, and many more. And just like investor trading, cryptocurrency trading also allows trading in cryptocurrency/currency pairs—for example, Bitcoin/Dollar, Bitcoin/Euro, etc. The changing dynamics of popular such pairs set the bar for bitcoins and other cryptocurrencies too. This, in a way, also depends on the demand-supply mechanism.

Future analysis:

Cryptocurrencies are the most volatile currencies in the world. No one knows the future position of neither bitcoin nor any other cryptocurrency, yet it holds high value in the hope of reaping increased benefits in the future. Currently, there has been much optimism that bitcoin will drive the economic force. In the same manner, something or the other may alter the expectations of the investors and traders that in turn contributes to fluctuating the bitcoin price.

Hence, future analysis by top investors and trade market experts in one factor that legitimately influences the bitcoin price.

Adoption of users:

Despite the high demand for bitcoins, not everyone perceives bitcoin as a potential currency. The number of people adopting bitcoin and cryptocurrency is increasing day by day.

The number may grow up to huge that increases the demand creating the demand-supply mismatch. In the current scenario, many are already adopting bitcoin as a potential alternative currency. This, coupled with reduced and liberal regulatory policies, will definitely show a significant impact on the already volatile nature of the bitcoin price.

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Utility:

The utility of the currency is one prime factor that determines the price of bitcoin. The holding of a currency asset must incentivize the asset holders.

This is the first factor that the traders and investors first think about, and this factor contributes to the decision-making process of whether to invest or not in bitcoin. This becomes a ripple effect, finally turning out to be the demand factor for bitcoin that contributes to the fluctuation price of bitcoin.

Cost of production:

Although bitcoins are virtual, they are created and incur some amount of cost of production. One primary factor that determines the cost of production is electricity. Be it for production or during mining, electricity plays a crucial role in determining the cost of production and mining as well that in turn influences the price rise or fall of the bitcoin.

Conclusion

The cryptocurrency market in itself is highly volatile in nature. Hence, numerous factors contribute to the dwindling nature of cryptocurrency and bitcoin price ranges.

While the above mentioned are the most common factors that influence the bitcoin price, other factors like speculative trading, trading influence, etc., are no less contributions in setting the bars for the already dwindling price ranges. However, one needs to be aware of the above factors before venturing into bitcoin trading to avoid losses and strategize on profits.

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