As we go deeper into the world of Bitcoin another set of commonly asked questions are, what determines the price of Bitcoin, and why does the price of the bitcoin rise and fall sporadically.
The answer to this question is simple. The major factor that determines the price of Bitcoin is demand and supply. Other factors may include cost of producing a bitcoin in the mining process, the competition available, and the exchanges it is traded on.
The Supply And Demand
The price of bitcoin rises when there is an increase in the demand at a limited supply rate and it falls when there is a decrease in its demand. The price of bitcoin signifies how much people are willing to pay for it based on its value in the future.
The supply of bitcoin is impacted by the policies that control the creation of bitcoin at a fixed rate. The rate at which bitcoin is created has reduced over time from 6.9% in 2016 to 4.4% in 2017 then to 4.0% in 2018; this is as a result of the halving of block rewards.
The total number of bitcoin that can be mined also affects its supply rate. Only 21 million bitcoin can be mined of which 18 million has already been mined. It is predicted that the last bitcoin will be mined by 2140. Once the last bitcoin has been mined the price will now be determined by its practicability and some other factors.
The popularity of other crytocurrencies such as litecoin, bitcoin cash, ether, XRP can also affect the price of the bitcoin. The competition against the bitcoin keeps the price of the bitcoin down.
Cost Of Producing Bitcoin
The cost incurred during the process of mining bitcoin such as electricity cost, hardware and software cost is directly related to the price of bitcoin. As more people become miners the competition in mining becomes tougher and the mathematical problems they are required to solve before earning a block reward becomes more difficult.
This will therefore increase the cost of producing bitcoin thereby affecting the price of bitcoin once it is successfully created. Another factor that makes the price of bitcoin grow is upgrading of security, privacy and user experience will increase the request of bitcoin.
If a major government endorses the use of bitcoin the price will increase. Creation of businesses that encourages the use of bitcoin as its means of transaction. The price of bitcoin can also fall if there are problems in its security system and anonymity, lack of trust in the cryptocurrency by the people for any reason and market manipulation.