Once upon a time, someone bought 2 Papa John’s pizzas for 10,000 bitcoins. Nowadays, people would kill for that amount of bitcoin (let alone when the price was at its all-time high in late 2017). Over the past few months, bitcoin has somewhat stabilized in the $3500-4500 range but who knows what’s going to happen next? When it was reaching an all-time high, there was a lot of speculation that bitcoin was actually a bubble, readying itself to pop. A bubble, as per Investopedia, is an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. In simple terms, it’s when the price of a certain thing immensely increases within a certain time frame and then suddenly rapidly decreases.
So what happened with that? Was bitcoin a bubble? When it comes to bubbles, Tulip Mania always comes to mind since it is regarded to be the first ever economic bubble. It actually had a lot of similarities with bitcoin: risky investments, volatility in price and arguably, the bubble popped.
According to Bloomberg, yes, the bitcoin bubble did in fact pop but that doesn’t mean bitcoin is doomed. At this point, bitcoin had already survived several bubbles including one in 2011 (that might be just as bad as the most recent pop).
What Affects The Price of Bitcoin?
Although bitcoin had its similarities to Tulip Mania, the two aren’t exactly the same. One is a highly advanced technological cryptocurrency and the other is… well… a flower. Although the economics of it all are the same, the factors that affect their price change are totally different. There are several factors that make the price of cryptocurrencies go up and down. In case of bitcoin, these are:
Supply and Demand
The supply and demand for bitcoin affect its price in 2 major ways:
- Bitcoins are only introduced to the market when miners process the blocks. With the popularity of bitcoin increasing, the rate at which new coins are introduced is designed to slow over time. This creates a scenario wherein the demand of bitcoin increases faster than the supply, creating a price spike.
- The supply of bitcoin is capped at 21 million. Once the cap is hit, mining activities will no longer create new bitcoin and they will end up being supported by transaction fees.
Although bitcoin is the first and most well-known cryptocurrency, it’s not the only one out there. There are over a thousand cryptocurrencies in circulation right now and more are on their way. Investors watch over new ICOs to see what kind of competition they’ll have entering the market soon enough.
Take some of our fiat currencies as an example. The value of the U.S. dollar would be different if other strong currencies like the Yen or the Euro didn’t exist. Competitors usually keep the value of the investment in check.
When cryptocurrencies were first introduced to the world, not a lot of people knew about it so it didn’t really make sense for the media to get too much into it. Nowadays, bitcoin and other cryptocurrencies are being mentioned on news channels more often. Although not everyone is educated on how to use bitcoin, there are a lot of people who are at least aware of the existence of cryptocurrencies.
Now that there is a significant increase in cryptocurrency news, the stores that are told directly affect the price of our coins. According to Talk Business UK, “Positive news drives prices up, while negative publicity fosters fear and causes investors to let go of their coins.” The media that bitcoin gets has a lot to do with how people are going to publicly perceive bitcoin, and that’s a huge factor when it comes to price.
The Developed and Passionate Community
The bitcoin community, over the years, has grown to be the biggest one to date. Although it’s common to hear stories of people just riding waves (FOMO), there are a lot of smart people in the bitcoin community and both users and developers play a big role in the decision of the investors.
It all boils down to one thing: trust. There’s a reason that bitcoin is still the most valued digital asset (despite its recent price drop) and it’s because it has earned the trust of a lot of people over its 10 years of existence. The more trustworthy the coin is, the more likely people are going to invest in it. The more people invest in it, the more likely the price is going to rise.
Laws and Government Regulations
When bitcoin obtained its all-of-a-sudden popularity, the government were caught off guard. Normal government regulations that cover fiat currencies don’t apply to it. Until now, there is still a lot of uncertainty on how to properly govern these cryptocurrencies. There is still a lot of experimentation and testing the waters when it comes to the regulations of bitcoin.
Depending on the specific regulations imposed on bitcoin, the price can either go up or down. Let’s use an example: In April 2017, cryptocurrency was declared as a form of legal payment by Japan. This sparked a surge in bitcoin price. On the other hand, there have been examples of cryptocurrency being banned by the governments with those leading to significant dips in the market.
So how high or low can bitcoin go?
As you can see, the price of bitcoin is still pretty volatile until now. It’s hard to tell if it’ll ever get back to the price it once was, where it’ll be in the coming years, or if it’s ever going to recover at all from the recent hit it took. Generally, it’s hard to tell where it’s going from here.
Despite the big price dip in the recent months, there’s still hope for bitcoin to come back. As said earlier, this isn’t the first bubble that bitcoin has survived. It experienced a bubble in 2011 that was almost as big. It came back stronger than ever and reached an all-time high price in late 2017. So if you’re asking yourself if its even worth investing in bitcoin, the answer still is yes, why not?
Bitcoin is still in a good place right now. Despite the price drop, people would have still made a lot of money if they invested before the bubble grew as big as it did. Don’t lose hope, we’re still in the game and we’re going considerably strong.
Where do you think bitcoin is going to go? Do you think it’ll reach as high as it once flew? Let us know in the comments section down below!