The course of Bitcoin, its price records … and its spectacular dives 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 influencing the price, both up and down. “Bitcoin is an asset class that is not just evolving in its bubble,” notes Stanislas Barthelemi, a consultant at Blockchain Partner, a consulting firm affiliated with KPMG.
“Exogenous elements, of a macroeconomic nature, and endogenous to the crypto-sector, such as the difficulties encountered by stablecoin Terra, may have an impact on its course,” he recalls. The value of bitcoin can fall just as fast as the cryptocurrency appreciates. The digital token, which in contrast to shares on the stock exchange can be bought and sold 24 hours a day, 7 days a week on stock exchange platforms, is characterized by high volatility.
In just six months, from its high of over $ 68,500 on November 9, 2021 to its lowest point on May 12, at $ 25,400, the cryptocurrency has fallen by almost 63%. It has already experienced a decline of more than 80% over a year earlier. “Everything goes faster on bitcoin,” says Stanislas Barthelemi. However, the increase in cryptocurrency trading volume – if confirmed well over the years – should help reduce volatility over time.
The game of supply – limited to 21 million tokens – and demand
As with any asset, the volume of supply and demand is a crucial 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 amount of money creates a kind of scarcity that can only promote a strengthening of the value of cryptocurrency over time. Today, more than 19 million bitcoins have already been issued through the mining process, which validates transactions performed 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 affects the supply of bitcoins. About every four years, the cryptocurrency reward for miners is halved. This is the process of “halving” (literally “halving”). Miners are the ones who validate and secure bitcoin transactions on blockchain through their machines. These operations result in the creation of new blocks, which provide a history of transactions.
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 receive only 6.25 bitcoins per year. block. The issuance of new digital cryptocurrency tokens is therefore rarely every four years. And as the number of bitcoins produced becomes less frequent, the cryptocurrency tends to increase. It is therefore not surprising to find that each halving has been followed by a bullish phase for bitcoin.
Next expected halving: in 2024, miners will then be paid 3,125 bitcoins per. block.
Monetary policy and the relationship with tech stocks
The price of bitcoin can also be affected by monetary policy, as is the case with other assets. The decision of the Federal Reserve (Fed), the US Federal Reserve, to raise interest rates aggressively and reduce its balance sheet in an attempt to curb inflation has caused stock markets to fall, especially in the US, but also bitcoin and cryptocurrencies in general.
Conversely, central banks have flooded markets with liquidity in recent years through asset purchases, while keeping interest rates very low. A policy in the wake of the Covid-19 crisis aimed to revive economies, and which favored the rise in stock market prices. Cryptocurrencies followed the same movement.
Moreover, this new asset class appears to be increasingly correlated with major US technology stocks, particularly listed on the Nasdaq market in the US. By 2021, many players in traditional finance have embarked on cryptocurrencies. Traders invest in bitcoin, as they do in stocks in technology companies, and use comparable arbitrage. And the connections are multiplying between the crypto universe and large technology groups like Meta (ex-Facebook), which wants to develop its own metaverse where NFTs and cryptocurrencies could be exchanged.
The development of tech stocks in the stock market could therefore increasingly be an indicator of the development in the price of bitcoin.
The development of the regulatory framework
Not all countries will legislate in the same way about bitcoin. But one thing is for sure, the development of the legislation and the regulatory framework applied to players in the cryptocurrency world can have an impact on the price of bitcoin, even if it is based on decentralized blockchain technology. And so much the more so 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, the price was penalized.
Conversely, policies that encourage public adoption of bitcoin can only promote the rise in price. El Salvador and recently the Central African Republic have decided to make bitcoin a legal tender. But the demographic and economic weight of these two countries is too small to affect the price of cryptocurrency, which can be traded anywhere in the world. Even a significant change in the regulatory framework in the EU will not necessarily affect the price of bitcoin.
“It is the rules in China and especially in the United States that are moving prices today,” stresses Stanislas Barthelemi. “Because about 75% of the capital raised in the cryptoecosystem is raised by US funds,” he specifies. Next come Asian and then European funds.
The evolution of the adoption rate of cryptocurrency
Finally, the more cryptocurrency will be used by the public, companies and states, the more it will appear legitimate, and the more investors will be assured of its usefulness and value. Technical updates that can facilitate and develop its use can therefore increase the price of bitcoin.
Statements from very influential personalities, such as Elon Musk, can also occasionally affect its value. That was the case when the billionaire announced the possibility of buying Tesla cars with bitcoins. The price had suddenly jumped. This may 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 supply and demand for bitcoins. Etc.