The course of bitcoin, its price records… and its spectacular plunges have caused a lot of ink to flow. If the history of cryptocurrency – created in 2009 – remains short compared to other asset classes, it is already possible to determine what are the major factors that influence its price, both up and down. “Bitcoin is an asset class that does not only evolve in its bubble”, notes Stanislas Barthelemi, consultant at Blockchain Partner, a consulting firm attached to KPMG.
“Exogenous elements, of a macroeconomic nature, and endogenous to the crypto sector, like the difficulties encountered by the stablecoin Terra, can have an impact on its course”, he recalls. The value of bitcoin can fall as quickly as the cryptocurrency appreciates. The digital token which, unlike shares on the stock exchange, can be bought and sold 24/7 on exchanges, is characterized by high volatility.
In the space of just six months, from its peak at over $68,500 on November 9, 2021 to its low point hit on May 12, at $25,400, the cryptocurrency has fallen by almost 63%. It has already experienced falls of more than 80% over one year in the past. “Everything goes faster on bitcoin,” says Stanislas Barthelemi. However, the increase in cryptocurrency trading volumes – if confirmed well over the years – should help reduce its volatility over time.
The game of supply – limited to 21 million tokens – and demand
As with any asset, the quantity of supply and demand is a determining factor in setting the price of bitcoin and moving its course.
In this case, the computer protocol of the Bitcoin blockchain predicts that there will never be more than 21 million bitcoins in circulation. This limited money supply creates a form of scarcity, which can only promote a strengthening of the value of cryptocurrency over time. Today, more than 19 million bitcoins have already been issued through the mining process, which validates transactions carried out in cryptocurrency.
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If the offer must remain limited, the demand can change for its part. The stronger it is, the higher the price of bitcoin will rise. Conversely, the lower it is, the more the value of the cryptocurrency will fall.
The halving process, which reduces the number of new bitcoins
Another technical aspect affects the supply of bitcoins. Approximately every four years, the cryptocurrency reward given to miners is halved. This is the process of “halving” (literally, “halving”). Miners are those who validate and secure bitcoin transactions on the blockchain via their machines. These operations result in the creation of new blocks, which provide a history of transactions.
When the cryptocurrency was launched in 2009, a miner received 50 bitcoins for each validated block. Today, after three halvings – in 2012, 2016 and 2020 – miners only receive 6.25 bitcoins per block. The issuance of new digital cryptocurrency tokens therefore becomes rare every four years. And when the number of bitcoins produced becomes rarer, the cryptocurrency tends to appreciate. It is therefore not surprising to find that each halving has been followed by a bullish phase for bitcoin.
Next expected halving: in 2024, miners will then be paid 3.125 bitcoins per block.
Monetary policy and the correlation with tech stocks
The price of bitcoin can also be affected by monetary policy, as is the case with other assets. The decision of the Federal Reserve (Fed), the American central bank, to raise its rates aggressively and reduce its balance sheet in an attempt to curb inflation has caused the stock markets to fall, particularly in the United States, but also bitcoin and cryptocurrencies in general.
Conversely, central banks have flooded the markets with liquidity in recent years, through asset purchases, while keeping rates very low. A policy in the wake of the Covid-19 crisis intended to revive the economies and which favored the rise in stock market prices. Cryptocurrencies followed the same movement.
Moreover, this new asset class appears to be increasingly correlated with major American technology stocks, listed in particular on the Nasdaq market in the United States. In 2021, many players in traditional finance have embarked on cryptocurrencies. Traders invest in bitcoin as they do in tech company stocks, adopting comparable arbitrages. And the connections are multiplying between the crypto universe and large technological groups, like Meta (ex-Facebook) which wants to develop its own metaverse, where NFTs and cryptocurrencies could be exchanged.
The evolution of tech stocks on the stock market could therefore increasingly be an indicator of the evolution of the price of bitcoin.
The evolution of the regulatory framework
All countries will not legislate the same way on bitcoin. But one thing is certain, the evolution of legislation and the regulatory framework applied to players in the crypto world can have an impact on the price of bitcoin, although it is based on decentralized blockchain technology. And a fortiori if the regulation emanates from a powerful State. When China implemented drastic measures against bitcoin and banned cryptocurrency mining nationwide in the fall of 2021, its price was penalized.
Conversely, policies that encourage the adoption of bitcoin by populations can only promote the rise of its price. El Salvador and more recently the Central African Republic have decided to make bitcoin legal tender. But the demographic and economic weight of these two countries is too small to influence the price of cryptocurrency, which can be traded anywhere in the world. Even a significant change in the regulatory framework within the European Union would not necessarily affect the price of bitcoin.
“It’s the regulations in China and especially in the United States that are moving prices today,” underlines Stanislas Barthelemi. “Because about 75% of the capital raised in the crypto ecosystem is raised by American funds”, he specifies. Next come Asian and then European funds.
The Evolution of Cryptocurrency Adoption Rate
Finally, the more cryptocurrency will be used by the general public, businesses and States, the more it will appear legitimate, and the more investors will be reassured about its usefulness and value. Technical updates that can facilitate and develop its use can therefore increase the price of bitcoin.
Statements by very influential personalities, such as Elon Musk, can also occasionally affect its value. This was the case when the billionaire announced the possibility of buying Tesla cars with bitcoins. The price had suddenly jumped. This could also be the case if states decide to officially use bitcoin, for example to circumvent international sanctions.
Geopolitical, but also macroeconomic and technical factors can therefore have an overall effect on the supply and demand for bitcoins. And so on its course.