By now, you’ve probably had more than a few people tell you to buy Bitcoin because it is rising and is, therefore, the easiest money in the world to make. (If you’re going to buy low and sell high, of course, you actually want to buy when Bitcoin prices are low.)
These people could very easily be right, but it is important to understand why the price is rising so you can be sure it isn’t going to stop rising on your watch.
Bitcoin has been identified as being a huge potential disrupter to the entire financial system, which has put it at the forefront of many debates. The main thing to remember is it has proven to be hard enough to forecast where the economy is going, so it becomes even harder to forecast what price something that runs counter to the economy will settle at. Everything is so complex that all you can do is predict the general direction Bitcoin will go in and then reassess each factor along the way.
Factors Affecting Bitcoin Prices
There are so many factors to consider, but the biggest one is probably the one that applies to the most of us: hype and investor sentiment. You hear as much about Bitcoin now as you heard about gold five years ago and oil ten years ago. It is front of mind and very “controversial”. Anything of this type is sure to receive lots of attention, which increases the chance of investors going long in it assuming they agree with the bullish views.
Criticism of Traditional Finance
One of the factors that run completely counter to common sense is the criticisms of banks and financial institutions. Several important figures, including JP Morgan CEO Jamie Dimon, have called Bitcoin a total scam and said that Bitcoin prices will drop significantly at some point. You could view this in one of two ways. Either it is the truth, or someone whose business is threatened by the existence of Bitcoin is trying their best to bring it down. If the latter is the case, then this should give Bitcoin investors more confidence and run the prices up even more.
Media Coverage and Social Media
Hype has worked in a positive feedback loop for Bitcoin prices as investors on the side have watched, seen nothing bad happen with Bitcoin, and cautiously put their money in. This boosts prices and creates a continuing effect. There are occasionally market corrections, especially when users get spooked because of a technical or security problem with certain exchanges, but this is usually a temporary problem that is easily solved.
Supply and Demand
Supply and demand have a lot to do with the reasons that Bitcoin value is going up. Supply of Bitcoin works way different than fiat currencies in that there is no Central Bank. This means that there will never be such thing as quantitative easing, and you will always be sure of what the monetary policy for the following year is going to be. But not only is the supply of Bitcoin not used for political purposes, it also designed to be limited. There are going to be a maximum of 21 million Bitcoins ever mined. This, combined with the fact that many Bitcoins are lost due to user error, puts deflationary pressures on Bitcoin and creates a world where market forces are naturally pushing up Bitcoin prices.
The demand side of things has been greatly influenced by countries loosening their grip on the regulatory landscape in order to accommodate what they already know is coming. Some countries have decided to remain in retrograde and fight Bitcoin, but other governments, such as Canada, see the value in the idea and have started trying to co-opt it as their own.
It doesn’t even take a country like Canada working with the cryptocurrency to help Bitcoin prices; sometimes it can just be a matter of not being so aggressively against it from a legal standpoint as has started to occur in the States.
Overall, the longer that Bitcoin survives, the more likely it is to survive far into the future. As you look at Bitcoin prices, just think about what you think the end use of it will be and then feel free to invest or not invest as you wish.