What sets the price of Bitcoin?
The volatility in Bitcoin’s pricing has been the center of many discussions regarding this particular cryptocurrency. But what determines the price of Bitcoin? Read this article to learn about some factors that influence the price of Bitcoin.
Bitcoin has always been known for its infamous price volatility, which rather often can fluctuate by over 20% in just one day. And now, after enjoying an absolute bullish run in the past few months and sitting at $30,400 at the time of writing, people are shocked at how a currency that was worth just $3400 in March of 2020 can be worth this much now.
Unlike gold, oil, sugar, or other commodities, Bitcoin is a digital currency/asset and is not tangible. In other words, you cannot really see it or hold it in your hands. Instead, the blockchain tracks the ownership and executes transactions of Bitcoins, additionally, your precious Bitcoins are only accessible by your cryptographic keys.
So, if Bitcoin is intangible and its value is not pegged to some kind of real-world asset it begs the question, how does one determine the price of Bitcoin? Does Bitcoin even have intrinsic value?
These are valuable questions that have been asked by those who not only have a vested interest in Bitcoin but by those who are interested in it as well. Below, we have listed a few reasons and factors that set the price of Bitcoin.
Supply and demand
Because Bitcoin is a decentralized network that is secured and run by miners, all with their own interests at heart, there is no central authority that controls it. This means that there is no central organization or entity that is able to control the network and affect/change the price of Bitcoin. This is in contrast to global fiat currencies such as the US dollar or Japanese Yen, wherein the price and supply are either manipulated or outright controlled by their respective institutions.
Bitcoin’s price is largely controlled by supply and demand. Essentially this means that if there is more demand for Bitcoin, the price increases to decrease the demand, and inversely as the demand decreases, the price for Bitcoin also decreases to increase demand.
Though many people believe that the price of Bitcoin is centralized and the same across the board, this is a common misconception. Crypto exchanges set their prices based on the supply and demand of Bitcoin, which is why one crypto exchange that services one region may have one price for one Bitcoin and is higher or lower than the price per Bitcoin in another exchange. Sometimes the price differences can be in the thousands. It all depends on the current supply and demand in that particular exchange.
This is also why Bitcoin is highly speculative and is prone to large changes in price due to factors like government policies, actions, or simply hype. The factors previously mentioned are just some factors that influence a person’s decision to purchase Bitcoin which affect demand.
The supply of Bitcoin is fixed and only changes every 210,000 blocks mined (1 block mined on average every 10 minutes), which is approximately every 4 years. Also, the Bitcoin protocol has set a limit of how many Bitcoins can exist, which is 21 million Bitcoin. As the Bitcoin network becomes more popular the demand for Bitcoin increases. This means that the fixed rate of Bitcoin being mined and the limited supply should result in a gradual price increase over time.
The cost of mining Bitcoin
With regard to Bitcoin, mining is the process in which miner nodes on the Bitcoin network solve complex cryptographic problems, which is the process responsible for securing the network. The first miner to solve this problem adds a new block to the blockchain and receives the block reward, which is how new Bitcoins are added to the network. For more details about the mining process read our article here.
Bitcoin and crypto mining is an arduous and costly process which have costs heavily associated with electricity, labor, hardware, mining equipment, etc. A lot of capital, time, and resources are spent to compete with other miners on the network to solve the block first and receive the reward. It is because of this competitiveness that Bitcoin can boast is robust security.
Currently, the block reward in the Bitcoin blockchain is 6.25 Bitcoins, which is mined approximately every 10 minutes. The block reward went from 12.5 Bitcoins to 6.25 Bitcoins in May of 2020 and will be halved again in about 4 years.
This information is relevant to note because this directly affects how much money a miner is able to earn through Bitcoin. According to Jax.Network scientists and experts, it costs a miner approximately $7200 to $8000 to mine 1 Bitcoin. This, in a way, is an important factor to note when it comes to the price of Bitcoin. Though the price of Bitcoin may fluctuate, it is very unlikely that miners will be willing to sell their Bitcoin at a lower price than it took to mine it. This is because miners are motivated primarily by profit.
The process of mining is only possible on blockchain networks secured via Proof of Work, compared to other networks secured by other methods, such as Proof of Stake. Because Proof of Work blockchains require miners to spend resources to run and secure the network, it allows proponents of Bitcoin and other similar blockchains to argue that there must be some intrinsic value attributed to it as at some point people spent time and resources to mint new coins.
Other cryptocurrencies
As it stands, there are thousands of cryptocurrencies and crypto projects looking to develop their own coin and/or protocol. Many of them are in either direct or indirect competition with Bitcoin. As mentioned above, the price of Bitcoin is heavily determined by the supply and demand for it.
As other cryptocurrencies enter the market and gain momentum, they take up some of Bitcoin’s market share. In other words, the more money people spend in buying other crypto coins, the less money they will have to spend on Bitcoin, and therefore, demand decreases.
An important point to consider too was the crypto boom back in 2017, which saw many cryptocurrencies, Including Bitcoin, experience a great price surge. It was also the period during which many fraudulent projects were born. People were looking to capitalize on the crypto hype by making fake claims, promises, guarantees toward their crypto coins, or projects that would either not meet the criteria they set out or not be delivered at all. Because of this, ICO’s (Initial Coin Offerings) have amassed a terrible reputation in the crypto industry as well as in business and investment spheres. It was because of other scams and fraudulent projects that largely failed to deliver that Bitcoin and other prominent cryptocurrencies suffered as a result.
Conclusion
In our opinion, we believe that Bitcoin has mainly succeeded in becoming a global, decentralized currency which has gained a lot of trust due to the network’s great security. The price of Bitcoin, however, continues to be its Achilles heel as people, merchants, and customers would rather avoid such a volatile currency. If Bitcoin could somehow maintain its positive attributes and achieve more stable pricing, it would be a massive leap towards its mass adoption.
The Jax.Network has made a bold claim towards its own decentralized, scalable cryptocurrency that maintains a high level of security. Additionally, Jax.Network has further claimed that one of their native digital currencies, the Jax Coin, is stable in price. This is due to our innovations to our very own blockchain which not only provides superior scalability to Bitcoin but a reward mechanism that encourages a stable supply of coins being mined and thus leading to a very stable price.
To learn more about the Jax.Network blockchain’s ability to provide the much-needed stability in pricing, visit our website here, or for more technical details, read our whitepaper here.
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