INTRODUCTION

Cryptocurrency is an electronic exchange of money without involving any individual being. Therefore, no presence of any physical money or bill, it’s all online. Concisely way, it is a digital currency that’s been created from computer code. Transfer of cryptocurrency is online sitting on the couch or anywhere with a good internet connection. Few cryptocurrencies, for instance, Bitcoin and Ether are well-known, but new cryptocurrencies continue to be created every day in the digital space.

It is software that forms a decentralized, multicasting payment system with no central authority like the Federal Reserve or U.S. Treasury. It’s fair to call it a digital currency, but at the moment, most investors aren’t using it as currency to pay for things. Instead, they’re using it as a tentative investment to buy in the hope of turning a profit.^[1]

PRICE DETERMINATION

Unlike we buy stocks or bond in a corporation, bitcoin is different because it’s not a corporation. Thus, there are no corporate balance sheets to review. Bitcoin is not issued by a central bank or sponsored by a government, therefore the monetary policy and economic growth measurements that typically influence the value of money do not apply to bitcoin. The price of cryptocurrency is predisposed by factors such as the supply of bitcoin and market demand for it, the number of competing digital currencies and the exchanges it trades on.

Supply & Demand in the Market

More Demand, Less Supply = Price Goes Up  

More Supply, Less Demand = Price Goes Down  

Bitcoin is like any other commodity available in the market. The price of bitcoin is recognised by the market in which it trades. Specifically, its price is determined by how much someone is willing to pay for that bitcoin. The market sets the price of bitcoin as same as gold, oil, sugar, grains, or any other commodity is determined. Bitcoin follows the rule of any other market and it is subject to the principles of supply and demand.

In general, no one sets the bitcoin’s price nor we can trade it in one place. Each market determines its price based on supply and demand. Traders can trade bitcoin on many different platforms such as the Luno Exchange[2].

If you want to trade in bitcoin, you must have to choose a particular market. For instance, the Luno exchange sets a definite price at a definite time for a definite market. Here, you have not confused that Luno exchange fixes the bitcoin price. Instead, the traders who are buying and selling on the Luno exchange set the price. The price of bitcoin can alter at the moment, which is depending on whom you talk to, and it is often different from country to country.

Liquidity and Price of Bitcoin

The price of Bitcoin is very unpredictable, partly due to the ability to quickly trade the currency. The amount of bitcoin that flows through the market at any moment of time gives investors the ability to enter and exit positions rapidly.

If people are trading a high number of a particular asset, it becomes harder for one person or event to shift that price in any single direction. Think of it as a stream of water—you can redirect a small stream by putting down a few planks of wood.

With fiat currencies like the U.S. dollar and the British pound, people trade huge volumes every day. With Bitcoin, trading volumes are small in relation to the rest of the assets being traded daily—which means that single events can make a bigger difference.

Events Affecting Bitcoins Price

There are many influences in the bitcoin market by many events. If it is leaked that a large government is uncertain about how to regulate Bitcoin as occurred in China the price can fall.

There are also other factors affecting Bitcoin prices. There are only so many bitcoins available, and they are produced at a predictable rate. The ownership of those bitcoins is unevenly distributed—some Bitcoin giants have vast hoards of the currency in their wallets (digital storage). That, combined with liquidity, makes it easy for people to manipulate the market.

There are instances where the price can be driven down by the large traders who sell bitcoins off in high volume.

Competition

Bitcoin is the most well-known cryptocurrency in the world, but there are hundreds of other tokens vying for user’s attention. While bitcoin is still the leading option with regard to market capitalization, bitcoin cash (BCH), litecoin (LTC) and EOS are among its closest competitors as of January 2020[3]. Further, new initial money offerings[4] are constantly on the horizon, due to the relatively few barriers to entry. The crowd in the market is good news for investors because more competition keeps prices down. Luckily for bitcoin, its high visibility gives it an edge over its competitors.

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[1] https://www.investopedia.com/ask/answers/121515/bitcoin-legal-us.asp, Mara Lesemann, Feb 03 2020.

[2] Luno Exchange, https://www.luno.com/en/exchange

[3] CoinMarketCap. “Top 100 Cryptocurrencies by Market Capitalization, https://coinmarketcap.com/ Accessed Mar. 11, 2021.

[4] https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp