What Are The Factors Determining The Price Of 1 Bitcoin? - Part 2

Continuing from the previous post, here are the other factors determining the price of Bitcoin. It is hard to comprehend yet very crucial facts to be considered. It affects both investors as well as developers alike. 

Cost Of Production

Bitcoins even though virtual, are nonetheless produced products incurring a real cost of production with electricity consumption is the most important factor by far. As it is called Bitcoin mining it relies on a complicated cryptographic math problem that miners all compete to solve, where the first one to do so is rewarded with a block of newly minted bitcoins and any transaction fees that have been accumulated ever since the last block was found. The unique feature of Bitcoin production is that unlike other produced goods, bitcoin’s algorithm only allows for one block of bitcoins to be found on average once every ten minutes. What this means is that more producers that join in the competition for solving the math problem only have the effect of making that problem more difficult as well as more expensive solving to preserve that ten-minute interval. The researches have shown that indeed bitcoin’s market price is closely related to its marginal cost of production.  

Availability On Currency Exchanges

This is similar to equity investors trading stocks over indexes like the NYSE, Nasdaq, and the FTSE, cryptocurrency investors trade cryptocurrencies over Coinbase, GDAX, and other exchanges. It is similar to traditional currency exchanges, where these platforms let investors’ trade cryptocurrency/currency pairs like for example, BTC/USD or Bitcoin/US dollar. 

It was observed that the more popular an exchange becomes, the easier it may draw in additional participants creating a network effect. Thereby it is capitalizing on its market clout setting rules governing how the currencies are added. Here for an example, the release of the Simple Agreement for Future Tokens framework seeks to define how ICOs comply with securities regulations. Thereby the bitcoin’s presence on these exchanges implies a level of regulatory compliance regardless of the legal gray area in which cryptocurrencies operate.

Regulations And Legal Matters

It was seen that the rapid rise in the popularity of Bitcoin and other cryptocurrencies has caused regulators to debate how to classify such digital assets as the Securities and Exchange Commission classifies cryptocurrencies as securities, the US Commodities Futures Trading Commission considers Bitcoin as a commodity. While there is confusion over which regulator will set the rules for cryptocurrencies has created uncertainty despite the surging market capitalizations. It was furthermore noted that the market has witnessed the rollout of many financial products using Bitcoin as an underlying asset such as exchange-traded funds, futures, and other derivatives. 

Impacting the prices in two ways where the first one is that it provides Bitcoin access to investors who cannot afford to purchase an actual Bitcoin thus increasing demand. Secondly, it reduces price volatility by allowing institutional investors believing Bitcoin futures are overvalued or undervalued using their substantial resources making bets that Bitcoin prices will move in the opposite direction.  

Forks And Governance Stability

Even though Bitcoin is not governed by a central authority, it still heavily relies on developers and miners thereby processing transactions and keep the blockchain secure, changing to the software are consensus-driven tending to frustrate the Bitcoin community as fundamental issues typically taking a long time to resolve. 

Currently, the issue of scalability has been a particular pain point as the number of transactions that can be processed depends on the size of blocks, and the Bitcoin software which by now is currently only able to process approximately the three transactions per second. Even though this wasn’t a concern when there was little demand for cryptocurrencies, it still worries many that slow transaction speeds will push investors towards competitive cryptocurrencies. 

While the fact to be noted is that the community is divided over the best way to increase the number of transactions, changes to the rules governing the use of the underlying software called forks. Concerning this, whereas there are quite a few soft forks about rule changes that do not result in the creation of new cryptocurrencies, past Bitcoin hard forks have included Bitcoin Cash and Bitcoin Gold. 

Should You Invest In Bitcoin?

To many, the rapid appreciation of Bitcoin and the cryptocurrencies is similar to the speculative bubble created by Tulip mania in the Netherlands in the 17th century. It is broadly important for regulators to protect investors as it will likely take years before the global impact of cryptocurrencies is truly felt. The relevant question here is whether they should invest in Bitcoin and what will be the global impact over the investment be to the public. There remains so much to be seen to the future of cryptocurrencies.

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