Bitcoin trading is slightly different from transactions in traditional currencies. Monetary policy, inflation rates and economic growth indicators do not apply to bitcoin because it is not issued by a central bank and is not backed by any government. The currency is decentralised and backed by a network of miners with the same privileges.
Despite its seemingly chaotic exchange rate, bitcoin still follows the rules of its decentralised economy, which determine its value. Several factors influence the bitcoin exchange rate.
Bitcoin supply can be compared to gold, as there is a predetermined maximum number of bitcoins that can be put into circulation, just as the total amount of gold on Earth is known. To mine bitcoin, miners must rely on the processing power of their computers by solving a complex mathematical equation. By solving this mathematical puzzle, miners will be rewarded in bitcoins, increasing the supply of coins available on the market.
The demand for bitcoin works at the same level as that for gold and other valuable resources. The more new investors enter bitcoin, seeking to buy it, the higher the price of bitcoin will rise.
Various studies have shown that the media is the most important source of influence on the price of bitcoin and other cryptocurrencies. Greater media coverage leads to a better understanding of cryptocurrencies and bitcoin by the general public. This has the potential to attract new people to cryptocurrencies.
Positive media coverage of bitcoin usually leads to a higher price, while negative coverage will have the opposite effect.
It is also important not to overlook the mass effect caused by some news in the media. An involved crypto investor who discovers certain information in the media should quickly analyse the information and assess its impact on the asset price in their portfolio. With social media, news spreads at the speed of fire and it is bound to affect bitcoin price.
Therefore, it is necessary to keep abreast of the latest bitcoin and cryptocurrency news so as not to miss future bullish or bearish waves.
As with traditional currencies, political events affect the exchange rate of various cryptocurrencies. However, bitcoin price movements caused by political events are usually the opposite of what happens with central bank currencies. The lack of confidence in a national economy leads people to believe in cryptocurrencies rather than traditional currencies.
Because bitcoin is the symbolic leader in cryptocurrency, its price will rise first before it affects other currencies in the market.
As bitcoin and cryptocurrencies are a new concept, it is difficult for governments to take an average stance on them. Governments are constantly changing regulations regarding them, including taxation.
While bitcoin is decentralised and independent of central government influence, the rules adopted by the latter will have a direct impact on the system as they apply to investors in cryptocurrencies. Concerns that may arise from government pronouncements or decisions will certainly lead to a fall in the price of bitcoin.
Another factor in bitcoin's volatility has to do with its management by the community, which is constantly trying to find consensus to secure its future in the medium and long term. In addition, the decisions made by the community affect the bitcoin blockchain and therefore the entire ecosystem as a whole.
When consensus cannot be reached, as was the case with the increase in block size in 2017, a hard fork could occur, leading to a split into two separate blocks according to different rules. This is how Bitcoin Cash was born in August 2017.
These periods of instability within the community regarding bitcoin rules and its future have often harmed the price of bitcoin. However, once the fork was implemented, there was a rebounding trend.
Bitcoin's volatility creates a good trading environment, and bitcoin can also be a long-term investment because its supply is unregulated and it has huge advantages over national currencies.
But to take full advantage of bitcoin, you need to first choose a proven and reliable investment platform. Broex is a trusted companion in the world of cryptocurrencies. The platform has a user-friendly and simple interface for investing and is available to all kinds of users. Other advantages of Broex include high security with a secure online wallet, the ability to deposit with a bank card in USD/EUR and the lowest commissions on the market of less than 1%.