Bitcoin price factors – What influences the Bitcoin price?

August 1, 2014 18:05 UTC

Everyone knows by now that Bitcoin is highly volatile, even with a fairly stable price currently. However, you may be wondering what things contribute to that price and how can you be prepared for what’s yet to come. I’ll take you through some of the most influential Bitcoin price factors so you’ll never have to wonder why the price has changed.


Bitcoin Price Factor #7: Government Regulation

Some people would like to see Bitcoin become more regulated because when the government regulates Bitcoin, it declares it as legal or illegal. If it’s legal, The laws governing Bitcoin help people to gauge its usability and longevity.

On the flip side, we have people who are afraid of government regulation as the whole point of a decentralized currency is to stay decentralized so that no one can control it. (Such a redundant sentence.) The government controls the amount of fiat currency that the country has in circulation. They can produce more money but cannot directly decrease the amount of money in circulation. Wallet addresses store Bitcoins and wallets might get accidentally deleted, or they might be locked with a forgotten password, but there will only ever be 21 million Bitcoins minted. That allows Bitcoin’s value to increase over time instead of decreasing it.

Now picture this, the government declares that only they will be allowed to mine cryptocurrency and that only their currency is legal in their country. Well, now we have the same situation as before the invention of cryptocurrencies. The government mints all the money and they can start and stop mining at will. Perhaps they will even change the code to allow for even more currency mining when they are running low on funds. The only thing different is the form of money being transacted. There are a lot of scary things that cryptocurrency regulation may bring, and some people are quite afraid of new regulations.

The people who push for Bitcoin regulation will buy more of it, pushing the value of a Bitcoin up, but those who are afraid of government regulation might start panic-selling when news like the NYDFS BitLicense comes into play. That makes for the Bitcoin price factor of government regulation to be that of stability in price as you can interpret the news in two different ways.

Bitcoin Price Factor #6: Shoppers

Without people to use Bitcoin as a currency, Bitcoin wouldn’t serve any purpose as currency. When people pay for things with Bitcoin, they are adding to its credibility and showing the world that there are people who would like to use Bitcoin to pay for things. Companies like Dell, New Egg, and Dish Network among many others have taken notice of the power of a Bitcoin and allowed customers to purchase their products and services with it. Xapo is offering a new credit card that allows you to spend Bitcoins with stores accepting regular debit cards.

Even though shoppers don’t have any direct influence on the price, they do help spread Bitcoin around the world as a viable currency. Therefore, the Bitcoin price factor of people shopping on Bitcoin has no short term influence, but they offer a larger market.

Bitcoin Price Factor #5: Mining

Bitcoin mining is what makes time travel Bitcoin transactions possible. The more miners, the more secure the network as long as no one owns 51% or more of the network. A 51% attack is possible when one entity owns at least 51% of the mining power on the network.

Consider this: A person buys a mansion with 10,000 Bitcoins. A real estate agent who sold the buyer the mansion receives the funds and transfers the deed into the buyer’s name, thus completing the transaction. The buyer now has the mansion, and the real estate agent has the 10,000 Bitcoins from the sale, right? Well, the buyer owns 51% of the Bitcoin network’s hash rate, and they want their money back while keeping the house. The buyer forks the block-chain just before the transaction took place and uses the 51% of the network hash in order to race past the official portion of the fork, making the new branch longer than the original. In doing this, the whole network now sees the new branch as the legitimate branch and the original branch that contains the 10,000 BTC transaction, as the illegitimate branch. That means the buyer now has his 10,000 BTC back. That is known as a 51% attack.

The Bitcoin price factor of a 51% attack possibility is potential panic-selling.

The Bitcoin price factor for mining in general is a slight decrease in value for a couple reasons. Some miners save their Bitcoin as part of their buy-and-hold investment strategy, while others cash out to fiat. Miners also have high electrical bills to run their devices, so often miners will sell a chunk of their profits for fiat in order to pay the electric bills.

Bitcoin Price Factor #4: News

Although Joris would beg to differ in some regards, the news does play a role in the price of Bitcoin. Although he cites that enthusiasts and professional traders get information before everyone else from places like BitcoinTalk and private news tickers, and that’s very true, the vast majority get their information from the news. Where does the news get the information? We get our information from various sources; people like you, who email us, or we scour the internet for information just like the enthusiasts do.

With the vast majority of people reading the news, the vast majority of people will be acting on that news. If, for example, the news talks about having 51% of the network hash; some might respond with a DDoS attack on Chinese news trading was quite lucrative before the Mt. Gox crash. People would panic sell like crazy, so everyone who knew about the latest news where PBOC would blackball Bitcoin and then it would become just a rumor, would sell their stash and buy it back after the market started to go Bullish again.

The Bitcoin price factor of the news is that it provides articles where people will buy or sell Bitcoin depending on it’s content, sending its value higher or lower accordingly.

Bitcoin Price Factor #3: Large Businesses Dumping to Fiat

Not every place accepts Bitcoin yet; not every employee wants to accept Bitcoin for their wages, and not every government system accepts Bitcoin for things like taxes. Until the world catches up, some things still need to be paid in fiat currencies, so businesses often will sell a large portion of Bitcoin to pay for business expenses. This “dumping,” as it’s called, will keep the value of a Bitcoin in a depressed state. Depending on the sales volume of the company and how many companies are selling their Bitcoin at the time, this could emulate a “panic sell,” sending the price of a Bitcoin crashing.

The Bitcoin price factor of a large business dumping to fiat currency is that of a depression in the Bitcoin value.

Bitcoin Price Factor #2: Selling on Exchanges

As you’ve seen above, the common thread that governs why the factors work the way they do is because of buying and selling Bitcoin for other currencies. When a trader sells Bitcoin on an exchange, but at a very low amount, the price usually will not change, or will change very little. If a trader is a whale, that is, someone with a large number of Bitcoins around 1,000+ BTC, the price of a Bitcoin will decrease significantly due to his large sale. Generally, a whale trader’s order is not filled at a single price, and this is why the price drops. Someone might buy 1 BTC for $600; another might buy 20 BTC at $598; a few more trades for different values might occur in the middle, and then the seller finishes with selling 0.1 BTC to a buyer for $500. What’s the new buy price of Bitcoin? $499 perhaps.

The Bitcoin price factor for someone selling Bitcoins on an exchange is always a drop in the value of a Bitcoin.

Bitcoin Price Factor #1: Buying on Exchanges

The number one thing that influences the value of a Bitcoin is how much someone is willing to pay for one Bitcoin, of course. When you place an order on an exchange in order to buy Bitcoin, you decide what the value of a Bitcoin is to you. The more people who are willing to buy Bitcoins, the greater the chance for an increase in the overall value of a Bitcoin. Sellers sell to the highest bid price first, so whoever is the highest bidder at the moment, is the one who decides the value of a Bitcoin at the moment.

The Bitcoin price factor of someone buying Bitcoins on an exchange is always a rise in the value of a Bitcoin.

Do you know of any other Bitcoin price factors not listed? If so, please leave a comment below or post in the CCN forums with what you find to be a factor. I’m excited to see what you think up. Check out the live Bitcoin price at our Bitcoin Price Chart here.

Disclosure: I am fully invested in Bitcoin and have a pre-order Xapo card.

Featured image by Shutterstock.

Last modified: September 4, 2014 12:15 UTC

More of: 51% Attack

Rick Mac Gillis entered the world of Cryptocurrencies in late 2013. He is a controversial journalist committed to investigating and exposing the "dirty bits" of the community. With over a decade of experience in LAMP web development with a focus in custom cryptographic security methods and ethical hacking, Rick Mac Gillis understands the need for proper security standards in cryptocurrency.