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How is bitcoin price determined?

Bitcoin was created by a mysterious Satoshi Nakamoto (a person or group still unknown) in 2009. It is one type of crypto currency. Other known crypto currencies are Ethereum, Ripple, Bitcoin Cash and others. By market-capitalization bitcoin is the largest.

Crypto currencies are not acknowledged by central banks and hence are used principally outside governmental financial establishment and banking. Crypto currencies are the decentralized form of exchange.  It is exchanged only over the internet.

All the transaction which happens is recorded in a ledger called block. Once the recording is complete that is block is filled another one is generated. The blocks are connected with previous one by the hash and form a block chain.

Several factors have impacted the behavior of the price of the bitcoin. Few are discussed below:

  1. Supply and demand economics

Fiat currency rates are governed by currency in circulation, changing reserve requirements, trade balances, adjusting discount rates etc. Bitcoin protocol is such that it allows the creation of new bitcoin at fixed rates, which gets slower each passing year. The rates were 9.8 percent (2015), 6.9 percent (2016), and 4.3 percent (2017). This slowing down creates a circumstance in which the demand for bitcoin rises at a faster rate than supply. This, in turn, drives the price northwards.

The supply is also impacted by the number of bitcoin that exist. It is maximum bitcoin that will be issued is capped at 21 million. That is once the number is reached new bitcoin cannot be mined. 80 percent has already been mined and only 20 percent remains to be mined. The prices will depend upon its use in transaction, demand and government authenticity of bitcoin.

  1. Crypto currencies competition

There are hundreds (700+) crypto currencies existing at present and because of a relatively low barrier to enter many new crypto currencies are entering markets and are in competition with bitcoin. Many of the crypto currencies are traded on the exchanges (Coinbase, Dogecoin, Peercoin etc.).

It is a general phenomenon that presences of many competitors keep the value in check. It is just like the value of USD is in check because of the pound, euro, or yen.  Same applies to Bitcoin. Price is in check because of other crypto currencies prevailing in the market.

  1. Government regulation and policies

Because of the rapid popularity of bitcoin and other crypto currencies, most of the government regulators were caught off guard. Most of the governments are in the confused state, should they treat crypto currency as currency or commodity or something else. Anyway, the governments will have to set rules and regulations, because of its immense rising value and ever-growing market capitalization.

Prices can impact in two ways. One by opening up bitcoin to investors and second by allowing institutional investors who think that bitcoin futures are over/under valued and to use the resources. This way the volatility of prices can be reduced.

  1. Size of mining network

Price of bitcoin is also dependent on the size of its mining network. To mine a new bitcoin one should have a large network which is more difficult and thus more costly. The cost of “producing” one new bitcoin has a direct effect on the price of mining it.

Apart from the factors discussed above there are many other factors that determine the price of bitcoin.

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