The price of bitcoin, its price records … and its spectacular drops have caused a lot of ink to flow. If the history of cryptocurrency – created in 2009 – remains short compared to other asset classes, it is already possible to determine what are the main factors that influence its price, both up and down. “Bitcoin is an asset class that doesn’t just evolve in its bubble,” notes Stanislas Barthelemi, a consultant at Blockchain Partner, a consultancy firm linked to KPMG.
“Exogenous elements, of a macroeconomic nature, and endogenous to the crypto sector, such as the difficulties encountered by the stablecoin Terra, can affect its course,” he recalls. The value of bitcoin can decline as quickly as the cryptocurrency appreciates. The digital token which, unlike shares on the stock exchange, can be bought and sold 24/7 on exchange platforms, is characterized by high volatility.
In just six months, from its high of over $ 68,500 on November 9, 2021 to its low on May 12, of $ 25,400, the cryptocurrency is down nearly 63%. It has already experienced drops of more than 80% in one year in the past. “Everything goes faster on bitcoin,” says Stanislas Barthelemi. However, the increase in cryptocurrency trading volumes – if confirmed well over the years – should help reduce its volatility over time.
The game of supply – limited to 21 million tokens – and of demand
As with any asset, the amount of supply and demand is a determining factor in setting the price of bitcoin and moving its course.
In this case, the Bitcoin blockchain computer protocol predicts that there will never be more than 21 million bitcoins in circulation. This limited supply of money creates a form of scarcity, which can only promote a strengthening in the value of the cryptocurrency over time. Today, over 19 million bitcoins are already issued through the mining process, which validates transactions made in cryptocurrency.
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If supply is to remain limited, demand may change for its part. The stronger it is, the higher the price of bitcoin will rise. Conversely, the lower it is, the more the value of the cryptocurrency will decrease.
The halving process, which reduces the number of new bitcoins
Another technical aspect concerns the supply of bitcoins. Approximately every four years, the cryptocurrency reward awarded to miners is halved. This is the “halving” (literally, “halving”) process. Miners are those who validate and secure bitcoin transactions on the blockchain via their machines. These operations involve the creation of new blocks, which provide a transaction history.
When the cryptocurrency was launched in 2009, a miner received 50 bitcoins for each validated block. Today, after three halves – in 2012, 2016 and 2020 – miners are only receiving 6.25 bitcoins per block. The issuance of new digital cryptocurrency tokens therefore becomes rare every four years. And as the number of bitcoins produced becomes rarer, the cryptocurrency tends to appreciate. It is therefore not surprising to find that each halving was followed by a bullish phase for bitcoin.
Next halving expected: in 2024, miners will then be paid 3,125 bitcoins per block.
Monetary policy and correlation with technology stocks
The price of bitcoin can also be influenced by monetary policy, as is the case with other assets. The decision by the Federal Reserve (Fed), the American central bank, to aggressively raise rates and reduce its balance sheet in an attempt to curb inflation has caused equity markets to fall, particularly in the United States, but also bitcoin and cryptocurrencies. in general.
On the contrary, in recent years central banks have flooded the markets with liquidity, through the purchase of assets, while keeping rates very low. A policy in the wake of the Covid-19 crisis aimed at reviving economies and which has favored the rise in stock market prices. Cryptocurrencies followed the same movement.
Furthermore, this new asset class appears increasingly correlated with the main American technology stocks, listed in particular on the Nasdaq market in the United States. In 2021, many traditional finance players have embarked on cryptocurrencies. Traders invest in bitcoin as they do in stocks of technology companies, adopting comparable arbitrage. And the connections between the crypto universe and large technological groups are multiplying, such as Meta (formerly Facebook) which wants to develop its own metaverse, where to exchange NFTs and cryptocurrencies.
The evolution of tech stocks on the stock market could therefore increasingly be an indicator of the evolution of the price of bitcoin.
The evolution of the regulatory framework
All countries will not legislate equally on bitcoin. But one thing is certain, the evolution of the legislation and the regulatory framework applied to the players of the crypto world can have an impact on the price of bitcoin, although it is based on decentralized blockchain technology. And a fortiori if the regulation emanates from a powerful state. When China implemented drastic measures against bitcoin and banned cryptocurrency mining nationwide in the fall of 2021, its price was penalized.
Conversely, policies that encourage the adoption of bitcoin by populations can only encourage its price to rise. El Salvador and more recently the Central African Republic have decided to make bitcoin legal tender. But the demographic and economic weight of these two countries is too small to influence the price of the cryptocurrency, which can be traded anywhere in the world. Even a significant change in the regulatory framework within the European Union would not necessarily affect the price of bitcoin.
“It is the regulations in China and especially in the United States that are driving prices today,” says Stanislas Barthelemi. “Because about 75% of the capital raised in the crypto ecosystem is raised by American funds”, he specifies. Then come the Asian and then European funds.
The evolution of the cryptocurrency adoption rate
Finally, the more cryptocurrency is used by the general public, businesses and states, the more legitimate it will appear and the more investors will be reassured of its usefulness and value. Technical updates that can facilitate and develop its use can therefore increase the price of bitcoin.
Statements of very influential personalities, such as Elon Musk, can also occasionally affect its value. This was the case when the billionaire announced the possibility of buying Tesla cars with bitcoin. The price had suddenly jumped. This could also be the case if states decide to officially use bitcoin, for example to circumvent international sanctions.
Geopolitical, but also macroeconomic and technical factors can therefore have an overall effect on the supply and demand of bitcoin. And so on.