Bitcoin is not issued by a central authority, nor is it controlled by a centralized body. That’s why it was believed for a long time that the Bitcoin price is not impacted by factors that influence the value of fiat. Over time, this opinion was proved to be the wrong one. What factors impact the Bitcoin price? Does Bitcoin correlate with fiat money in one or another way? Let us check. Market Forces and Bitcoin Market forces, those that dictate the price of any asset, impact the value of Bitcoin. Supply and Demand It is easy. If there are many coins (supply) but few buyers (demand), the coin price is dropping. And on the contrary, if there are not sufficient coins but the demand is high, the coin price is increasing. The limited issuance here plays its role, too. There are inflationary and deflationary coins. Those coins that have unlimited supply are called inflationary. Over time, when the number of coins grows, it may cause the price to decrease. Deflationary coins have a limited supply. For example, . It means that only 21,000,000,000 coins can ever be mined. That’s why it is expected that over time, the BTC price is going to grow. And this is why Bitcoin is frequently referred to as digital gold. Bitcoin’s supply is limited to 21,000,000,000 Source: https://river.com/learn/how-is-the-bitcoin-price-determined/ Production Cost Bitcoin doesn’t appear out of nowhere. It is mined. is known for being a very energy-demanding process. The mining equipment isn’t cheap, either. These are the factors that directly impact the coin price. Bitcoin mining Along with these direct factors, are indirect ones, too. In the Bitcoin case, it is the mining difficulty. When the mining difficulty grows, miners have to perform more work to add blocks. It results in a higher cost for the coin. Thus, the coin value may grow if the situation is favorable. Competition Bitcoin dominates the cryptocurrency market. But in 2017, its share in the market was 80% while now, it is slightly over 50%. It is connected with the fact that there are many projects competing for the investment share now. Most of them are trying to address such real-world problems as the accessibility of financial services, environmental problems, etc. Increased competition has already impacted the BTC market share. However, its impact on the BTC value depends on the competitor’s quality rather than on their number. Regulation If a project becomes forbidden on a big territory, its price drops. And on the contrary, with the increased project’s adoption, the coin price starts growing. It applies to Bitcoin, too. It is connected to such factors as crypto adoption and the fear, uncertainty, and doubt (FUD) factor. When Bitcoin is banned in a country, people start being afraid that they may lose their funds and withdraw liquidity from Bitcoin. It leads to a BTC price drop. And on the contrary, when a country introduces a friendly crypto regulation or accepts Bitcoin, people gain confidence in crypto and start investing in it. Thus, the Bitcoin price starts growing. What Else? Cryptocurrency is decentralized. There is no central body to decide how many coins are going to be issued. It was the main reason to believe earlier that the prices of cryptocurrency aren’t impacted by factors that normally influence the fiat money prices. Now, however, we can clearly see that it is not completely correct. There is some impact even though it is alleviated by some more factors. Consumer Price Index Since the Bitcoin launch, the CPI was smoothly increasing while the BTC price was fluctuating heavily. Within a short period, one may perceive it as a sign that there is no connection between CPI and the BTC price. But now, as time passed, we can see clearly that both values are increasing even though fluctuations are present. Source: https://www.econstor.eu/bitstream/10419/176446/1/10.1186_s40854-017-0054-0.pdf Federal Funds Rate The Federal Funds Rate (FFR) has a definite impact on the Bitcoin price. Bitcoin is a speculative asset. When the FFR increases, there is a reduction in speculative investments. Hence, the Bitcoin price starts falling. And on the contrary, when the FFR drops, the BTC price tends to grow. Source: https://www.econstor.eu/bitstream/10419/176446/1/10.1186_s40854-017-0054-0.pdf What’s Behind It? As you can see, there are many factors that impact the Bitcoin price. However, liquidity is the major and, probably, the only factor that impacts the situation in the market, including crypto prices. In simple words, it works like this. 1 - National banks print money, and the situation in the market becomes more relaxed. 2 - People have more money and start investing it in stable assets such as real estate or other traditional assets whose value is stable or increases over time. 3 - With time, people get used to the market stability, and start investing funds left after purchasing real estate in more risky assets such as cryptocurrency. 4 - The liquidity level in the market is growing which leads to the growth of trading activities, supply, and demand. The Bitcoin price starts growing. But what if people don’t have free funds to invest? If an emergency occurs (e.g. a military conflict), banks react to it by raising FFR. It leads to an increase in inflation levels. People have fewer funds to invest. Moreover, they start withdrawing crypto liquidity and transferring it into fiat. The liquidity level in the crypto market drops. And thus, the Bitcoin price (and other coins’ prices, too) starts falling. The market is cyclic. It means that drops and rises are repeated. In 2019, when the COVID pandemic started, and governments initiated providing financial help to people, more liquidity was injected into the market. People started investing free money in riskier assets such as crypto. That’s why we can observe a growth of BTC price at that time. Source: CoinMarketCap The development of pandemic and further boost in financial help, along with a wider acceptance of crypto all around the world, including Coinbase listing on NASDAQ led to two BTC price spikes in 2021. Further, the escalation of the political relationship between Russia and Ukraine with the consequent military aggression from Russia destabilized the political and economical situation in the world. People started withdrawing liquidity from risky assets. The Bitcoin price crashed, and the cryptocurrency market entered a bearish cycle. By now, the Bitcoin price is still moving down. Source: Coinmarketcap. What to Expect? The cryptocurrency market is maturing and acquiring the features of the Forex market. Bitcoin and crypto are not a mystery anymore. Over time, they will be evolving and becoming more predictable and thus, more competitive in the financial market.
