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What Determines the Price of Bitcoin?

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If you’re going to invest in Bitcoin, or any cryptocurrency for that matter, it’s
important to understand the market factors that drive the price one way or
another. There are a number of these, which often interact with one another, but
for simplicity purposes, we will examine them one by one.
China
No country has more of an effect on the price of Bitcoin than China. More fiat to
Bitcoin trades from China than any other country, and some of the largest
exchanges in the world are based there. Approximately 70% of the world’s
Bitcoin trades occur in the Chinese market.
Good news from China equals good news for the market in general. A December
2013 announcement from the People’s Bank of China decreeing that Bitcoin was
not a currency tanked the market by 35% in under an hour. Conversely, news of
Bitcoin being adopted by Chinese business often leads to the Bitcoin price
rising.
One major factor that makes China such a driving force in the Bitcoin market is
the Chinese government’s strict financial regulation of assets held in Chinese
Yuan. Both wealthy and middle class Chinese citizens are looking for a way to
secure their financial future without tying it to the value of the Yuan, which has
been devalued in recent years. Bitcoin represents the perfect way for them to do
this. Further Yuan devaluation will only lead to increased Bitcoin growth in the
future.
Russia
Like China, Russia is also suffering from issues with its fiat currency, the ruble.
The ruble has continued to fall against the US dollar year-on-year for the past 3
years. As it does so, Russians like to protect their wealth by moving their rubles
into Bitcoin.
Adoption is Russia is also a major player in Bitcoin short-term price movements.
An announcement in May 2017 that Ulmart, the largest online retailer in Russia,
would begin accepting Bitcoin payments, took the market to a then all time high
of $1800.
Government Regulation
Government support for Bitcoin will also play a part in the price of it as a
commodity. Although Bitcoin is not tied to any one nation, for mass adoption to
occur – it needs the support of government. The main contention for
governments right now is Bitcoin’s perceived “complete anonymity” and how it
relates to crime, especially tax evasion. Once measures are in place to eliminate
the anonymity element (regardless of your moral standpoint on this),
government support will rise, and so will the price of Bitcoin.
Conversely, any time there is news of a government crackdown on Bitcoin either
as a digital currency, or on a technology level – the price decreases
Technological Innovation
Advances in the Bitcoin network are vital if it is to continue increasing in value.
As previously mentioned, new developments like SegWit and the lighting
network, which will ease scalability issues, are important in the development of
the coin on a technological front.
The coin’s ability to handle micropayments (transactions of small monetary
value) is one key area that was have a big effect on the future value. Currently
the effectiveness of the system for micropayments is limited by the 1MB block
size, which leads to minimum transaction amounts and delays in payment
processing if you send too many transactions too quickly. With the
implementation of lightning network, the team hopes to ease these issues and
further increase Bitcoin’s real world viability.
Mass Media
Despite what we’d like to believe, the vast majority of society still get their news
from just 1 or 2 sources. To put it bluntly, the mainstream media doesn’t
understand Bitcoin one iota. Due to the lack of proper cryptocurrency or crypto
asset journalists working for major outlets, they would rather give airtime to
good soundbites like “Bitcoin could reach $100,000 within 5 years” or inversely
“Bitcoin is the biggest bubble since the dotcom craze” than examine it at a
technological level, or focus on any innovations that have been made. Positive
news for Bitcoin in the media leads to new investors, and negative news leads to
a decrease in price.
The other side of this is that some Bitcoin commentators have already made up
their mind without even examining the technology. If you see an article in 2017
talking about Bitcoin as a front for “drug dealing” or “money laundering”, then
you can safely disregard it.
For your own personal news source, I recommend dedicated sites like
http://coindesk.com for legitimate, non-biased or overhyped news regarding
Bitcoin and cryptocurrency.

Funding for Blockchain Companies
As blockchain companies continue to receive more funding and investment, the
currency receives more legitimization. Many blockchain related startups now
accept investments in Bitcoin and other cryptocurrencies like Ethereum.
The Middle Class Investor
An often overlooked factor. While Bitcoin may be increasing in popularity
among younger investors and some larger institutions, it is still very much off
the radar of the American middle class. In other words think about Tom, aged
55, from Maryland. He’s married and has a low 6 figure income from his upper
management job. His portfolio currently consists mainly of blue chip stocks and
low-cost index funds. He’s not trying to hit any home runs, he’s just trying to
shore up his retirement assets. Once Bitcoin cements its reputation as a form of
“digital gold” and more of a solid long-term investment rather than the
speculative play thing it is seen as by some major institutions, it’s value will
continue to rise. In other words, we need more people like Tom as our target
Bitcoin buyer for the value to continue increasing.
Technical Analysis
It should be noted that traditional technical analysis or chart analysis like one
would do on stocks is tough, as the cryptocurrency market is a) only 8 years old
so lacks comprehensive data and b) unlike anything we’ve ever seen before.
However, charting does have its place in the Bitcoin universe and I would
recommend you study stock technical analysis books if you are planning to trade
Bitcoin on a serious level, with candlestick charting being the most useful for the
cryptocurrency market.
Mass Adoption
As more merchants accept Bitcoin as a means of payment, the more it
legitimizes the currency. Bitcoin’s scalability issues will be the main
determinant of this. Adoption shows no sign of slowing down and the total
number of businesses accepting the currency continues to grow. If corporate
giants such as Amazon and Apple began to accept Bitcoin payments, then the
price is likely to increase once again.

 

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