What determines the value?

1. Government Regulation

Usually, the price of bitcoin is affected, when a government establishes regulations for digital currencies. The actions from the government does not necessarily have to address bitcoins specifically. An example was the Cyprus banking crisis, when the government was dependant on financial support. As a result, discussions have surfaced whether Cyprus should adopt bitcoins as their new currency.

A reason for the governments’ skeptic attitude is the anonymity. To attenuate the issue, regulations, to include a third party supervision mechanism and eliminate the anonymity, have been proposed. This will change bitcoin’s value.

2. Media Influence

Just like every trend, the media can influence the bitcoin demand and value. Seeing news about cyber-attacks or other misuses can arouse panic and the bitcoin price falls. People, afraid of a potential loss, could sell their bitcoins, dragging the value down. Simultaneously, if crypto-supportive websites display positive feedback from well known experts and the perspectives of the cryptocurrency, excitement rises and so does bitcoin’s value. 

3. Stability of the Bitcoin Network

Many people want a secure network where there is a low risk of losing money. An outstanding difference between bitcoins and conventional currencies, is that the cryptocurrency is perceived as an “economic bubble“, suggesting insecurity and instability. This is because they are only known to be valuable when exchanged with other currencies, not having any inherent value on their own. If the transactions of bitcoins among people and companies stops, the “bubble” would burst and the price of bitcoins fall.

4. The Bitcoin Supply

Bitcoins have a limited supply of 21 million bitcoins, of which 12 million have already been mined. The amount of coins in circulation may never exceed this number and due to the controlled supply, many speculate that the price will continue to rise.

5. Wider Public Acceptance

Despite the risks and critiques, many common firms  like Reddit and WordPress are following the trend and start accepting bitcoins for transactions. As a result, other companies in competition try to adapt to the innovative environment and follow their lead. The value of bitcoin rises, as the demand increases.

6. Large Businesses Dumping to Fiat Currency

Since the bitcoin is so controversial and new to the economy, only a small number of people and companies can accept them. To pay for business expenses, companies are obliged to sell their bitcoins and pay with fiat money. This act is known as “dumping” and is one of the main reasons for a decrease in bitcoin’s value.

7. Technological Changes and Innovations

Technological advancement and innovations can impact the development of the digital currency. An example is when bitcoin integrated in PayPal’s payment system and woken the interest among many people. Also, many startup companies start using crowdfunding platforms, like Ethereal, that accept bitcoins. Blockstream is an innovation that could utilise bitcoins in the addition of new functions and boost bitcoin’s value.

8. Market Manipulation

Market manipulation can also have a vast effect on the price. A scenario would be when traders purchase a great amount of bitcoins. The excessive purchase makes the price appear like it is rising and then when they dump those purchased coins back to the market, they benefit from a higher profit than before.

⟹ Summarily, the value of bitcoin is determined by how much people are willing to pay for it, so its demand. There is a lot of space for speculations and manipulations, so the lesson is clear: don't sell your house to invest into bitcoins.



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