Bitcoin is known for its rapid price fluctuations, and understanding the forces driving the market will allow you to make better investment decisions. You don’t need to worry about all of these factors if you’re a first-time buyer, but if you have long-term investment goals, there are a few concepts that you should know about. Here are a few of the forces that affect the price of Bitcoin.
Supply and Demand
Bitcoin becomes more expensive when it is in high demand, and that’s why news, hype, and publicity can drive up the price of the coin. When a large number of people suddenly decide to buy Bitcoin, exchanges are able to charge high prices. Later, when there is relatively little demand for Bitcoin, buyers will sell off their Bitcoin, causing the coin to become cheaper once again.
By the same reasoning, Bitcoin’s price becomes lower when its supply is high. Bitcoin’s circulating supply grows larger when investors sell Bitcoin, but its total supply is determined by miners. Mining is the process that creates new Bitcoin, and prices become lower as more Bitcoin is created. Over time, mining will become less profitable and less Bitcoin will be created, which will keep prices at an ideal level.
Trading volume represents the amount of Bitcoin traded during a certain time span. This measure can be used to project market trends and predict Bitcoin’s future price. Making accurate predictions is a difficult skill to master, but you will probably see investment bloggers and market analysts using trading volume to explain their Bitcoin price predictions.
Bitcoin’s market cap is simply the total value of all the Bitcoin in existence. It is the result of Bitcoin’s price, not the cause of it. Nevertheless, market cap is a very important concept. Bitcoin’s price is only meaningful when it is compared to previous Bitcoin prices. Market cap, meanwhile, is the measure by which Bitcoin is more valuable than other competing cryptocurrencies.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.