There are a number of factors that influence the price of bitcoin that are distinct from those that effect traditional financial assets. Does it appear like anything has changed? Let's find out what's going on.
Factors influencing supply and demand are the most fundamental
Like other assets, Bitcoin's price fluctuates based on supply and demand. Bitcoin's supply is fixed at 21 million coins, unlike fiat money, which is subject to fluctuation.
A lot of people are interested in adopting BTC because the demand for BTC is usually high in cryptocurrency circles. It will rise in price as a result of increased demand, especially when institutional investors become involved.
For example, in early 2021, when enterprises and institutions began buying and keeping bitcoin, the price surged dramatically because demand outpaced the rate at which new coins were being placed on the market for sale, resulting in a drop in the total available supply of the cryptocurrency.
However, if more people want to sell it, the price will go down.
ADOPTION BY THE INSTITUTION
Investors' perceptions of Bitcoin are greatly influenced by the media.
The year 2021 will be remembered as the year of tremendous adoption of bitcoin by both institutions and enterprises, despite the volatility of its price.
There was an average AUM of $31 billion and an average Bitcoin holding of 650K in 2021 for Grayscale Bitcoin Trust.
Also, regulatory events can have an impact on the price of bitcoins. The price of Bitcoin can rise or fall as a result of regulatory changes that influence investment in or use of the digital currency.
Recent Bitcoin-Related News
Let's take a look at an example of how the price of BTC might be affected by indirect news events, such as stories concerning a country's political condition.
An uprising in Kazakhstan that would last for a week began on January 2nd, 2022. This event had a significant impact on the crypto market, yet most people were unaware of it. Currently, Kazakhstan is the world's second-largest Bitcoin miner by hash rate. It is the second-largest country in the world in terms of hash rate, accounting for around 18 percent of the worldwide total.
When news of an uprising broke, the crypto market reacted within 24 hours, and the BTC price fell 13.1% from January 2 to January 8.
BTC Is Becoming More and More Like Traditional Assets in Value
The decentralized nature of cryptocurrencies should shield them from traditional market news such as reporting on macroeconomic conditions or central bank policy decisions. While this may not be the case, the current trend indicates otherwise.
According to World Bank research, equities returns all over the world are greatly influenced by public opinion on the state of the global economy. In the short term, this effect is not reversible, which suggests an underlying cause of asset price changes driven by mood.
As a non-traditional asset, Bitcoin appears to be affected by public opinion.
This is supported by recent statistics on the association between Bitcoin and major stock indexes.
In the past, crypto assets have shown little association with mainstream market indexes. It is clear that there is a strong linkage between Bitcoin's price and the S&P 500 as the daily correlation increased to 0.47 on January 28, 2022.
New themes are forming in the crypto industry as it grows, which we haven't seen before. In the beginning, bitcoin was seen as a fringe asset, but it is now performing more like a standard asset that is affected by the same market dynamics. The price of bitcoin fluctuates in response to news about crypto legislation and institutional use, as well as shifts in the overall state of the economy and major events throughout the world.
Now in its second week, Russia's war on Ukraine has made cryptocurrency a major part of the battle.
Since the conflict began on February 24th, more than 1.2 million Ukrainians have fled their homes, and the government of Ukraine estimates that more than 2,000 civilians have been killed. The war's toll on human life is already high, and there appears to be no end in sight.
Ukraine's fight against Russia has encouraged people around the world to donate to the cause, and cryptocurrency has provided a creative means to do so. More than $50 million worth of cryptocurrency was sent to the Ukrainian government after a tweet asking for donations in the cryptocurrency. Plans to mint NFTs for the Ukrainian military have also been announced by the administration. On the other hand, the United States Treasury is concerned about Russian cyberattacks on cryptocurrency companies and worries that Russia is using crypto to escape sanctions. Russia's invasion of Ukraine is now being used as a ruse by cryptocurrency scammers.
Cryptocurrency markets have become even more volatile as a result of this, and experts expect the volatility to continue. Global adoption of cryptocurrency and current alignment with the stock market strengthen the connection between cryptocurrency and the international conflict. after dipping below $35,000 immediately following the attack, Bitcoin price(USD) is hanging around $40,000 and Ethereum is back around $3,000 Whatever the cause of the panic, experts warn against taking any financial decisions based on it.
Since other cryptocurrencies like Ethereum (and smaller altcoins) tend to follow Bitcoin's patterns (due to its enormous market cap), Bitcoin is a good predictor of the overall crypto market. Even though Bitcoin recently hit a new all-time high, it was nothing out of the ordinary for the volatile cryptocurrency. As such, investors should not take these regular fluctuations lightly, nor should they make any big investment decisions as a result of these variations.
Everything from new technology to government regulation has the potential to have a huge impact on the cryptocurrency market, which is still in its infancy. Whatever the news or fluctuations in the price of bitcoin may be, here's how to invest wisely.
For many conventional long-term investors, this is the standard piece of advice: "Set it and forget it." It's possible that your bitcoin investments are causing you undue stress if the market's dramatic dips keep you from getting on board.
An investor's most critical task, regardless of their choice of asset class (stocks or Bitcoin), is creating and adhering to a strategy that works for them. That's the advice of CFP and president of Bone Fide Wealth, Douglas Boneparth. When it comes to an asset that you care about, "buying the drop" may seem like a good idea, but it isn't always.