Cryptocurrencies are one of the most valued assets for investment in the current market. The existing proposal in the fundamentals of cryptocurrencies makes many interested in these assets. The price of Bitcoin generated great representation in this market, as seen with news and analysis in the media.
However, there are common questions about the price of these cryptocurrencies: how does cryptoasset price formation occur, and what influences their rise or fall? To find out, here you’ll find three factors that have a direct influence on the price of cryptocurrencies.
Why is it important to watch the price of Bitcoin?
All players involved with cryptocurrencies should be aware of the price of Bitcoin. Even if Bitcoin exists regardless of its market price, the price inevitably ends up influencing the participants involved, directly or indirectly. Below, we’ll explain the influence of Bitcoin for each party involved.
For traders: Certainly, traders are the group that suffers the most influence from the price of Bitcoin. The trader is the one who speculates based on the price of an asset and is the most interested in making purchases at low prices and sales at high prices. As a trader, you should be aware of this cryptocurrency periodically. Depending on the operational profile, this occurs in seconds, minutes, days, or weeks.
For holders: Holders play an important role in the market because they believe in the value of a cryptoasset. Price has a secondary role, but a holder who owns Bitcoin in a wallet believes that this cryptocurrency tends to appreciate itself in the future. So, the price is important not as a main factor, but as a confirmer of long-term value. A holder doesn’t care about the price of Bitcoin in the short term, only in the long run.
For miners: Miners have a high cost of electricity and specialized materials, and are paid through the Bitcoin rewards they receive for their activity. Therefore, the price can be an incentive to mining, because the higher the price of bitcoin, consequently the higher the reward for miners. The work of the miners is critical to the security of the bitcoin network as a whole, due to the increased processing.
Now that you’re familiar with who plays an important role in the pricing of bitcoin, it’s time to discuss the three topics that most influence the price of Bitcoin!
Increased use of Bitcoin as technology and means of exchange
Like any asset, the credibility of the cryptocurrency market directly affects the price of Bitcoin. This is because if there’s greater use of technology, both for trading, as well as the purchase and sale of goods. In turn, this generates greater interest in the asset and consequently influences its price.
Historically, we have witnessed how much this market’s credibility has increased over time. While it was under scrutiny in its early years, today, Bitcoin is seen as an alternative to fiat currencies. For instance, Bitcoin has a maximum limit of 21 million (i.e. there is a shortage of this asset). This has led many to bet on it as an alternative to currencies suffering from inflation.
The security generated in the knowledge about the inviolability of the network came with time. Today, Bitcoin is known as part of a decentralized network in which everyone can contribute but no one is solely responsible for it. However, anyone can contribute to improvements in the Bitcoin network code. It is a time-long process that is reviewed by thousands within the network.
These factors generated greater knowledge in the network, causing large companies to link to cryptocurrency and accept it as payment. The increased use of the network brought credibility and higher demand for cryptocurrency we see today.
Hashrate and Market Strength
An interesting factor is the hashrate, which indicates the financial commitment of miners in the network. If the price of Bitcoin, for example, falls in the short term and this metric remains stable or rises, it’s possible to understand that the fundamentals remain solid – indicating that this technology is trustworthy. Also, the confidence implied in the price increase came through two other important factors: the payment system and transactional costs.
P2P payment system and transaction costs
Two points that bring a lot of credit to Bitcoin are the P2P payment system and the low transaction costs. What’s a P2P payment system? In this model, there are no mediators in the negotiations. Instead of traditional trading, the bitcoin exchange takes place directly between a seller and a buyer. If someone wants to buy something, they just transfer Bitcoin to the seller’s wallet.
The fact that there are no intermediaries makes it easier for costs to be lower. To make an international shipment in the traditional model, for example, the costs are high. With Bitcoin, you can route this asset anywhere in the world at low costs.
Interestingly, there’s no percentage charged per transaction in this system, regardless of the transacted volume. Low costs and ease of transaction are qualities that have brought even greater credit to Bitcoin. Now, let’s talk about institutional investors. After all, they’re the ones that typically set the price of an asset.
Entry of institutional investors
The entry of large investors into the cryptocurrency market is another significant factor that influences price. In any market, the presence of institutional people implies that influential people, in various areas of the world, participate in that market. So, if a renowned investor is buying Bitcoin, for example, this tends to bring a demand for that asset. And with the demand, the price increase.
In other markets, the principle that “institutions always win” is used. Obviously, institutions also lose when it involves trading. Due to their leverage, whatever actions they take within a market are more significant.
Institutions have highly qualified professionals: investment funds have mathematicians, statisticians, specialists in financial products, among other employees of high standard – whenever opportunities within the cryptocurrency market called for it. Thus, these investors understand that it’s worth taking advantage of this flow and defining the exposure as part of their equity in the market.
We see the exposure of the institutions clearly in actions, future, and role in the cryptocurrency market. To trade Bitcoin and not be against these investors (i.e. buy when they are selling, for example), it is important to be detail-oriented.
How a trader can use institutional strength to their advantage
Traders must take advantage and carry out operations always in the same direction as institutions. Obviously, it’s easier said than done, but it can be simple as being aware of market signs. Here are the basic factors that you’ll need to keep an eye on:
Caring when operating in exhaust movements: Market has gone up too much? Then wait for the fix to buy. Making purchases in exhaustion means that the purchase will occur at very high prices. The market should correct itself, you trigger the stop, and then the market goes back up. See the trend, know how to take advantage by using tools such as moving averages and Volume at Price to identify key asset points.
Evaluate what the trend is: There’s no point in trying to find reversals all the time; the chance of making a mistake is high. Evaluate the movement, if applicable make trades against the trend with calculated risk, but know how to measure the risk and avoid searching for tops or funds.
Increased public interest: Generally, it’s a topic that tends to interfere with the price of Bitcoin. All it takes is one look at Google Trends to know what we’re talking about
Increased search for Bitcoin on the internet
There are several ways to measure the public’s interest in a subject. Some include: search for trends, mentions on social networks, news headlines, etc. All of these are easy and accessible ways to take note of market behaviors.
The best place to watch for opportunities is on the internet. After all, it’s where Bitcoin was born. Since Satoshi Nakamoto’s first paper spread, the internet has been the driving force behind Bitcoin. So keeping up with it is a good indication of what might happen to this cryptocurrency, right?
There was a strong search for the word “Bitcoin” after 2013. In December 2017, the search peaked, as well as the price of Bitcoin. Just like a graph of any asset, the word search chart had its moments of “exhaustion”. But overall, the long-term price of Bitcoin rose as its mentions rose on the internet. This shows public engagement and appreciation of Bitcoin in the last 3-4 years.
What’s the next step?
While it’s difficult to predict, the indicators show that the search force continues to increase, generating more people operating, investing, and understanding about Bitcoin.
This favors this cryptocurrency, as well as educating the rest of the population. Again, the higher the demand, the higher the price will rise for an asset. Buyers seeking Bitcoin means that this asset should appreciate itself.
Now that we’ve addressed the main factors that influence the price of Bitcoin, it’s time to take the next step. What are the criteria you believe most influence the price of Bitcoin? Share your thoughts with us in the comments, and feel free to read more from Vector’s blog!