What the Bitcoin exchange rate depends on

Cost of production

Bitcoin is a virtual asset, but each new coin requires investment.

The main expense in BTC mining is the high energy costs, as the very essence of mining is solving a complex problem. The more people involved, the higher the total power of the network, but the complexity of the calculations also increases.

Depending on the price of electricity, the cost of BTC mining is in the range of 12-21 thousand dollars (as of August 2021). If we are talking about mass mining (on mining farms), it is worth considering the cost of equipment and setting up the infrastructure.

Competition with altcoins

Bitcoin holds the first place in the cryptocurrency market as the most popular and most secure asset, and this will not change in the near future.

However, the entire digital asset industry is in its infancy. New technologies and types of tokens are emerging. Therefore, in time, it is possible that altcoins will be able to compete in the market with Bitcoin.

Already now analysts claim that BTC is not the best tool in terms of blockchain technology, and some altcoins are more suitable for the role of “digital gold”.

The “Market Dominance” index is useful in this matter. It refers to a coin’s share of the total mass of cryptocurrencies.

As of August 22, 2021, bitcoin’s market dominance is 43.94%. The same figure for ETH (2nd place in capitalization) is 18.21%.

A factor that may affect the competition process is the introduction of DeFi, which utilizes the Ethereum blockchain. Consequently, altcoins will be in higher demand, which may affect the price of BTC.

Government regulation

One of the main aspects of cryptocurrency is its anonymity and lack of governance. Any attempt by the government to control the distribution, use or circulation of bitcoin will affect its price.

There is no general consensus on this issue in the world. Some countries recognize Bitcoin as a means of settlement in financial transactions, while others prohibit it:

Some states do not yet have clear legislation regarding cryptocurrency. In the US, for example, there is a noticeable conflict between jurisdictions. The SEC classifies bitcoin and other cryptocurrencies as securities, while the CFTC treats digital currency as a commodity. In Australia, BTC is officially considered property, and transactions involving it are barter.

Availability of BTC on exchanges

Transactions taking place on trading platforms (Coinbase, GDAX) differ little from similar actions on securities exchanges.

The availability of bitcoin on such platforms is related to the growth of prices. The less supply, the greater the scarcity, and thus the higher the rate.

Pumping

Artificial increase in the rate of BTC. The name is taken from the English pump – “to inflate a bubble”. The bitcoin rate is affected by the fact that when buying coins in large volumes, the price of bitcoin increases sharply. After reaching the planned peak, dumping follows: pampers sell assets at the maximum price, making a profit.

Since this action is expensive, it is started by collusion of several large traders. Influential investors who have a lot of coins are called “whales”.

This is not a new technology on the stock exchange. A similar strategy was already used in the U.S. market for stocks of small-capitalization companies in the early 2000s.

Futures

A relatively new financial instrument for the cryptocurrency market. It represents a contract to buy bitcoin in the future at a fixed (at the time of the transaction) price.

It was first used on December 10, 2017. CME Group (the largest financial derivatives market in the US) launched bitcoin futures trading. Analysts believe that this event brought large investors to the market, thus raising the index of confidence in virtual currencies.

A distinction is made between delivery and settlement contracts. In the first case, the seller sends the cryptocurrency to the buyer on the completion date of the transaction at an agreed price. Settlement bitcoin futures are closed without transferring the subject of the transaction. There is a monetary settlement in the amount of the difference between the contract price and the value of the asset on the date of execution.

Traders use “leverage” during transactions. This mechanism allows you to work with borrowed funds.

Bitcoin futures transactions are often used as a hedging tool (insurance against financial risks). A variant of speculation on volatility is also possible. Experienced traders who are skilled in technical analysis and are able to predict changes in the exchange rate of the coin can earn in this way.

Hard Fork

The rise and fall of bitcoin depends on the stability of the source software. Situations arise when changes need to be added to the blockchain code. In such cases, the users of the network must come to a common decision. If part of the miners do not agree with such a correction – they continue to support (mine coins, confirm transactions) the original chain. And on the basis of the modified blockchain, a new cryptocurrency is formed. Such a process is called a hardfork.

Such events affect the value of the cryptocurrency:

• Holders of coins of the basic chain after the hardfork receive the same number of new tokens, and the miner with software will be able to use 2 addresses for mining. This leads to an increase in capitals. Therefore, investors who know about the upcoming blockchain change start buying up the original cryptocurrency en masse, which leads to an increase in price.
• The community is divided. As a result, the number of users, and thus the support of the network decreases, which also affects the fluctuation of the BTC exchange rate.

Bitcoin, as the first cryptocurrency, went through hardforks more than others. Most of the coins that appeared turned out to be unsuccessful solutions (SBTC, BTU and others), although there were exceptions:

• Bitcoin Cash. The hardfork took place after the SegWit protocol update. Some users stayed on the old version of the blockchain, changing the block size to 8 MB.
• Bitcoin Gold. To increase the decentralization of the network, the coin was moved from the SHA-256 algorithm to Equilash.
• Bitcoin Diamond. The project uses the X13 algorithm. The emission was raised 10 times and retained support for SegWit and the 8 MB block.

These coins could not compete with the main currency, but the projects turned out to be promising. According to the website CoinMarketCap, they are ranked 12th, 84th and 124th, respectively, on August 22, 2021.

Information hype

The growth of the BTC rate is influenced by the news background. Reports about hacking crypto exchanges, banning mining in a particular country, even a simple opinion expressed by a recognized expert can significantly shift the price bar of the cryptocurrency.

The peculiarity of this volatility factor is that it cannot be predicted. It is impossible to predict which news or statement of a famous person will change the BTC rate.

For example, the statement of Ilon Musk (in May 2021) that Tesla will not accept bitcoin as payment for its cars led to a 10% drop in the rate. At the same time, the news that El Salvador recognized BTC as a means of payment (a month later) had almost no effect on the price of the main cryptocurrency.

Speculation

Making money with bitcoin is based on 2 main strategies:

• Investment. A person invests in a cryptocurrency asset, expecting that in the future it will rise in price. Such actions do not imply much activity.
• Speculation. Buy as cheaply as possible, and sell expensively. Since decentralized currency is not limited by regulations, and its market is relatively small, traders have a chance to use BTC price spikes to enrich themselves.

According to analysts, speculators are one of the main reasons for the volatility of the main cryptocurrency’s exchange rate.

Halving

In the blockchain was originally laid down a condition that halves the reward for miners after mining 210,000 blocks (approximately every 4 years). Such an event was called halving, and it has happened 3 times in bitcoin’s history. The last one was on May 11, 2020, when the payment dropped to 6.25 coins per block.

The decrease in issuance should curb inflation of the digital currency.

Studying the change in the bitcoin exchange rate after the halving, it can be seen that there is a significant increase in the price of the coin within 18 months.

At the same time, experts in economics and technical analysis observe a pattern in the fluctuation of the BTC price depending on the time that has passed after the halving or the time left until the next “halving”.

What bitcoin is secured by

The main crypto has no guarantees in the form of physical assets. No government affects the liquidity of virtual currency. BTC are lines of code that people exchange with each other. This is the opinion formed by people who do not trust blockchain money.

All these statements are true, only the conclusions are incorrect:

• Due to limited issuance, the coin is not subject to inflation.
• Cryptocurrency cannot be counterfeited.
• The demand for bitcoin is growing. As of October 2020, its audience exceeded 101 million people (data from the University of Cambridge).
• The financial efficiency of BTC is often higher than that of fiat money.
• Since 2011, it has been the most profitable asset in the last 10 years.

Therefore, the real security of the koin is the willingness of people to use the cryptocurrency and accept payment in it.

When evaluating digital money as a financial instrument, it can be seen that it is secured by the demand for the technology itself and the credibility of the coin.

Why the value differs on different exchanges

The price of bitcoin, presented on any cryptocurrency exchange, is formed from the ratio of supply and demand at a particular moment. If a small number of BTC coins are put up for trading – the price begins to rise until market saturation. Then comes the “correction” and the rate goes down until it reaches the balance point. But within a small period of time, the cost of bitcoin on a particular exchange will differ from the average.

Such factors also play a role:

1. The exchange’s place of registration. The rules of some platforms have restrictions on serving traders from certain countries. For example, Binance does not verify accounts from Belarus.
2. Sometimes you can observe a divergence in the price of BTC depending on the currency to which it is traded. Example – ETH/BTC $48,112.32 and LUNA/BTC $48,079.31 (price from 25.08.2021 Binance exchange).

The method of trading, where the difference in rates on exchanges is used – “Arbitrage”.

How to predict the price change

The cryptocurrency market is relatively new and is subject to large fluctuations. Many economic laws used for fiat money do not work well or are not applicable in this sphere at all. It is very difficult to confidently predict the change in the BTC rate.

There is no reliable algorithm, there are only general recommendations:

• Keep an eye on the activity of pampers. Large players stimulate the growth of the rate of digital currency to create favorable conditions for themselves. If you identify the stage of the pampa in time, you can sell your own assets at the maximum price.
• Tracking economic and political news. For example, the factors affecting the Bitcoin to dollar exchange rate depend on the laws passed in the US or China. Publications about supporting or banning the cryptocurrency can affect the price.
• Technical analysis plus working with resistance and support charts. One of the most challenging as it requires a lot of experience and specialized knowledge.
• Technical information and blockchain news. Knowing how the coin’s exchange rate behaved during past halwings, you can try to determine its development. The same applies to information about upcoming forks.

The future of Bitcoin

Since the very beginning of 2021, bitcoin’s popularity has peaked. Thousands of forecasts from experts about the further development of BTC have appeared.

As usual, the opinions of experts and analysts differ greatly. Someone predicts the imminent demise of the project, in place of which will come new, more perfect altcoins. Other experts point out that traditional venture capital companies and large hedge funds have started to invest in the electronic currency.

This is an indicator of reliability and stability, which means that BTC will retain its status as the main cryptocurrency.

Frequently Asked Questions