Bitcoin’s price, its price records… and its spectacular declines have caused a lot of ink to flow. If the history of cryptocurrency – created in 2009 – remains short compared to other asset classes, it is already possible to determine what are the main factors influencing the price, both up and down. “Bitcoin is an asset class that is not just evolving in its bubble,” notes Stanislas Barthelemi, consultant at Blockchain Partner, a consulting firm affiliated with KPMG.
“Exogenous elements, macroeconomic in nature and endogenous to the crypto sector, such as the difficulties faced by the stablecoin Terra, can impact its price,” he recalls. Bitcoin’s value can fall just as quickly as the cryptocurrency appreciates. The digital token which, unlike stocks on the exchange, can be bought and sold on exchange platforms 24 hours a day, 7 days a week, is characterized by high volatility.
In just six months, from its high of over $68,500 on November 9, 2021 to its low on May 12, at $25,400, the cryptocurrency is down nearly 63%. It has already experienced a fall of more than 80% in a year in the past. “Everything moves faster on bitcoin,” says Stanislas Barthelemi. The increase in cryptocurrency trading volume – if properly confirmed over the years – should help reduce its volatility over time.
The game of supply – limited to 21 million tokens – and demand
As with any asset, the amount of supply and demand is a determining factor in determining the price of bitcoin and changing its rate.
In this case, the Bitcoin blockchain computer protocol predicts that there will never be more than 21 million bitcoins in circulation. This limited money supply creates a form of scarcity, which in the long run can only lead to a strengthening of the value of cryptocurrency. Today, more than 19 million bitcoins have already been spent through the mining process, which validates transactions made in cryptocurrency.
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If supply is to be limited, demand may in turn change. The stronger it is, the higher the price of bitcoin will rise. Conversely, the lower it is, the more the cryptocurrency’s value will fall.
The halving process, reducing the number of new bitcoins
Another technical aspect affects the supply of bitcoins. About every four years, the cryptocurrency reward given to miners is halved. This is the process of ‘half’ (literally ‘halve’). Miners are the ones who validate and secure bitcoin transactions on the blockchain through their machines. These operations result in the creation of new blocks, which provide a history of transactions.
When the cryptocurrency was launched in 2009, a miner received 50 bitcoins for each validated block. Today, after three halvings – in 2012, 2016 and 2020 – miners receive only 6.25 bitcoins per block. The issuance of new digital cryptocurrency tokens is therefore becoming rare every four years. And when the number of bitcoins produced becomes rarer, the cryptocurrency tends to appreciate. It is therefore not surprising to find that every halving has been followed by a bullish phase for bitcoin.
Next expected halving: in 2024 miners will be paid out over 3,125 bitcoins per block.
Monetary policy and its correlation with technology stocks
As with other assets, the price of bitcoin can also be affected by monetary policy. The decision by the Federal Reserve (Fed), the US central bank, to aggressively raise its rates and shrink its balance sheet in an effort to curb inflation, has sent stock markets plummeting, especially in the United States, but also bitcoin. and cryptocurrencies in general.
Conversely, in recent years central banks have flooded markets with liquidity through asset purchases, while keeping interest rates very low. A policy in the wake of the Covid-19 crisis intended to revitalize the economies and promote the rise in stock prices. Cryptocurrencies followed the same movement.
In addition, this new asset class appears to increasingly correlate with major US technology stocks, particularly listed on the US Nasdaq market. In 2021, many players in traditional finance have started using cryptocurrencies. Traders invest in bitcoin as they do in stocks of technology companies, applying similar arbitrages. And the connections between the crypto universe and major tech groups, such as Meta (ex-Facebook) looking to develop its own metaverse, where NFTs and cryptocurrencies can be exchanged, are multiplying.
Thus, the evolution of tech stocks on the exchange could increasingly be an indicator of the evolution of the price of bitcoin.
The evolution of the regulatory framework
Not all countries will legislate on bitcoin in the same way. But one thing is certain, the evolution of the legislation and regulatory framework applied to players in the crypto world could have an impact on the price of bitcoin, even though it is based on decentralized blockchain technology. And a fortiori if the arrangement is based on a powerful state. When China implemented drastic measures against bitcoin in late 2021 and banned cryptocurrency mining nationwide, its price was penalized.
Conversely, policies that encourage population adoption of bitcoin can only promote its price rise. El Salvador and more recently the Central African Republic have decided to make bitcoin legal tender. But the demographic and economic weight of these two countries is too small to influence the price of cryptocurrency, which can be traded anywhere in the world. Even a significant change in the regulatory framework within the European Union would not necessarily affect the price of bitcoin.
“It is the regulations in China and especially in the United States that are driving prices up today,” emphasizes Stanislas Barthelemi. “Because about 75% of the capital raised in the crypto ecosystem is raised by US funds,” he specifies. Then come Asian and then European funds.
The Evolution of Cryptocurrency Adoption Rate
Finally, the more cryptocurrency will be used by the general public, companies and states, the more legit it will appear and the more reassured investors will be about its usefulness and value. Technical updates that can facilitate and develop its use can therefore increase the price of bitcoin.
Statements by highly influential personalities, such as Elon Musk, can also occasionally affect its value. This was the case when the billionaire announced the possibility of buying Tesla cars with bitcoins. The price had suddenly jumped. This could also be the case if states decide to officially use bitcoin, for example to circumvent international sanctions.
Geopolitical, but also macroeconomic and technical factors can therefore have a global effect on the supply and demand of bitcoins. And so on.