The volatility of bitcoin price has created several skeptical queries on the economic and mathematical grounds about price fluctuations while having a general explanation of its evaluation.
Due to the decentralized nature, the Bitcoin Trading Platform doesn’t stick to any financial policy of governments, and any government or underlying asset never supports bitcoin. This develops doubts among consumers and investors who acknowledge the price stability sign a virtual currency enjoys from government policies and support.
Table of Contents
Bitcoin demand and supply
The Bitcoin price has been determined in the exact way that the U.S. dollar value is determined: demand and supply. Such as fiat currency, whenever the bitcoin demand enhances, the price also increases. When the market of bitcoin falls, the price also falls.
In terms of supply, Bitcoin is a distinctive asset whose new supply plan is completely inelastic; it is totally resistant to demand fluctuations. When many goods, such as gold and fiat currency, experience a growth in demand, manufacturers react by boosting production & returning prices on stability. Once the market for bitcoin increases, new bitcoin production does not increase because of the adjustment difficulty.
News and Competition
BTC deals with the rivalry between meme coins like Dogecoin and altcoins like Ethereum, creating a diversification portfolio to engage investors. Updates by the existing crypto may decrease the BTC’s price compared to a different condition where Bitcoin was the single digital currency. Because of the media coverage, users may want to get cryptocurrency assets to have a positive future and neglect those with a shady outlook.
Production cost
Bitcoin’s production costs consist of crypto mining electricity charges, infrastructure expenses, and the complexity grade of the mathematical algorithm (like indirect cost). Several difficulty levels of BTC’s algorithms may decrease or increase the cryptocurrency’s production speed by affecting the supply of Bitcoin, which in turn impacts its price.
Rules and Regulation
Crypto regulations are continuously changing from country to country; for example, El Salvador accepts crypto as a legal tender, while China formally bans cryptocurrency transactions. The BTC price may decrease in case the government decides against cryptocurrencies. Moreover, uncertainty in regulations would create fear in investors, which may be dipping Bitcoin’s worth even more.
Impact of Inflation & Deflation
Inflation exists when the supply of money or the money velocity enhances quickly, affecting prices to grow and decreasing the currency’s worth. Bitcoin is deflationary due to its limited supply. The limited supply saves bitcoin from hyperinflation. Its government’s capability to print an infinite amount of currency can cause hyperinflation periods that help drive the value of various fiat currencies, such as the Zimbabwean dollar and German Mark, to zero.
Doubts on deflationary spirals may not be well-developed or backed by economists as demand and supply have always rectified fiat currency and bitcoin’s deflationary events. A limited supply also lets Bitcoin save its value, equivalent, and in a few cases, more favorable than gold.
What may happen if the price of Bitcoin falls to zero?
In case BTC’s price falls to zero, it would affect the enterprises, institutional investors, prices of cryptocurrencies, digital currencies, and the entire financial system. Assuming that the cost of BTC falls to zero, it would affect the value of different cryptocurrencies. Respectively, several investors would just withdraw (wholly or substantially) to diminish the losses, that depends on their investment type.
Big institutional investors might be at risk due to more massive investments to broaden their portfolios. The most manifest will be those who recently invested in higher prices or cryptocurrency derivatives and want to dissolve other assets to manage margin calls. Users may lose trust in a system that seems to be disintegrating, impacting crypto enterprises such as Binance, Coinbase, and more. Investments in such companies can also pause altogether or massively decline. Moreover, such businesses may not be able to hire, pay or recruit the personnel needed to run and extend them.
Other factors may include:
- Descending pressure on other assets like those sold in a fire sale to get money to meet the obligations, like margin calls, paying remuneration, premises maintenance, etc.
- The pile-up of bad debt/non-performing loans results in the loss of capital and revenue due to default payments.