Bitcoin (BTC) has become an increasingly popular investment vehicle over the last few years, attracting a large number of retail and institutional traders and investors.
Launched a little more than 10 years ago, it’s clients wish to diversify their investment portfolios with an alternative asset that is uncorrelated to traditional financial markets.
Considerations before indulging in Bitcoin
If you’re interested in taking advantage of the recent Bitcoin boom by buying the coin on an exchange, or trading it through derivatives such as CFDs via a broker like easyMarkets, you first need to understand what factors influence the price of this token.
This isn’t necessarily easy. Bitcoin is a relatively new asset launched in 2009, which means that there isn’t a lot of historical data from which we can analyze and draw conclusions.
The first thing to remember is that Bitcoin is a virtual currency,one that only exists online through a network of computers, thanks to block chain technology.
It’s also a decentralized and peer-to-peer cryptocurrency. This means that it doesn’t belong to anyone. There is no central bank controlling its money supply, and no central governing organization controls it.
The value of fiat currencies like the Australian dollar mainly depends on the changes in the monetary policy adopted by the Reserve Bank of Australia (RBA).
It’s impossible to consider “typical factors” that usually influence the value of a fiat currency, such as economic growth or the inflation rate.
You should instead take into consideration what mostly influences Bitcoin’s price today – the changes in the supply and demand relationship.
How are Bitcoins created?
On the supply side, you first need to understand how BTC coins are created. The process of creating Bitcoins is called mining.
This process helps the whole network to be secure by checking, monitoring, authenticating, and validating BTC transactions.
To validate transactions and add them to the block chain, miners need to solve complex mathematical problems through a protocol called proof-of-work (PoW).
To do so, miners setup mining machines and dedicate their computational power to solving these puzzles. As any kind of work deserves compensation, the first miner to add a block to the block chain receives a block reward, which is currently 6.25 BTC.
That’s how Bitcoin tokens are created or “released” from the total money supply of 21 million coins.
Since the creation of the Bitcoin network, “halvings” have been implemented to manage the BTC money supply by halving the block reward every 4 years or so.
The number of miners dedicated to securing the Bitcoin blockchain, the difficulty of the mathematical problems, as well as the level of the reward directly influence the number of newly created BTC available, all of which impact the supply side of the Bitcoin.
On the demand side, many factors influence the market sentiment.
- The adoption and use rates of Bitcoins
- Involvement from institutional investors
- The implementation of bans
- Legal frameworks for this asset
- The number of platforms you can buy Bitcoin from.