If a Bitcoin were a manufactured product owned by a company, it would be possible for its creator to set the price, either directly by arbitrarily determining it or indirectly by limiting or increasing the quantity available on the market. As Bitcoin is by nature decentralised, it is not possible to use these two methods to control its price.
As we have seen previously, the number of new bitcoins generated is fixed over a certain period of time by the mining process. New bitcoins are ”distributed” depending on the computing power on the network (hashrate).
Bitcoin, a volatile asset
Every day, the price of Bitcoin and other cryptoassets tends to fluctuate significantly. It is not uncommon to see increases or decreases of 10% or more over a day, which is extremely rare for other asset classes such as equities or precious metals.
Like these other assets, the value of Bitcoin is determined by supply and demand in marketplaces. At any given time, economic actors decide to buy and sell at a price they consider interesting. When a buyer and a seller agree on a price, a transaction is made and the price is set according to this last transaction.
”The value of Bitcoin is determined by supply and demand on marketplaces”
This is a first answer. The real question then becomes: what are the factors that influence the analysis of the different actors and push them to put a buy or sell order at a given price? There are many factors.
Fundamental analysis
The analysis of a project, its technological and economic components, its management by the development team, are excellent factors in determining the value of an asset such as Bitcoin. We can add new ones, for example a large company using the project technology, which can develop its adoption.
Similarly, there was a strong correlation between the number of press articles on Bitcoin and its price during the 2017 speculative bubble.
”The analysis of the technological and economic components of a project is an excellent factor to determine the value of an asset such as Bitcoin”
However, the valuation of the crypto market is difficult to determine because the underlying is not well defined. The value of a share is strongly influenced by the results of the company to which it corresponds. This is one of the reasons why Coinhouse offers you a personalised program to invest in this market.
Technical analysis
Technical analysis consists in analysing the chart curves of the various assets in order to identify trends and predict future developments based on past market movements.
Some cartesian minds will consider it to be saying that it will rain next Wednesday because it rained on the previous three Wednesdays. But when the majority of economic actors agree on the validity of such indicators, the market can indeed react in the expected direction.
”Technical analysis consists in analysing the chart curves of the various assets in order to identify trends and predict future market developments”
Mining
Remember that the mining industry has a strong impact on the development of Bitcoin. Most of the bitcoins created by the miners are put up for sale quickly, so that the mining pool can pay its bills, especially for electricity.
There is therefore constant downward pressure on the price due to the mining activity, which will gradually decrease as soon as bitcoin production slows down.
The economic context
Until 2017, the cryptocurrency market was a ground for geeks and those who had identified the opportunity early on. Today, the world of traditional finance is very interested in these assets as a vehicle for portfolio diversification.
During the month of April 2019, there was a sharp increase in prices on the crypto market that could be explained by transfers from traditional stock markets. These effects are likely to increase as investors gain confidence to enter this new market.
In April 2019, there was a sharp increase in cryptoassets prices that could be explained by transfers from traditional stock markets
As a result, there are multiple factors that influence the value of Bitcoin and other cryptoassets. The clever investors will be able to analyse several of them to make strategic investments, but this is a difficult task. Some of these factors, such as technical analysis, will be more useful in the short-term, while technological analysis of computer code is much more long-term.
