Bitcoin’s Volatility and Principle of Scarcity

And how do these two factors effect the price?

close up view of a golden coin
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I know. I know you have heard about Bitcoin mania a lot lately unless you live in a cave how Bitcoin went from $1 in April of 2011 to $64,863 in April 2021.

What is Bitcoin? And why the world is going bananas over it?

It’s a sort of a currency similar to our mighty Dollar. It’s not backed by any physical asset. However, Government controls the supply and demand of the dollar by lowering and raising the interest rate.

In the case of Bitcoin, no one controls it, and everyone controls it. In other words, every bitcoin transition is made public in the blockchain ledger and verified by the computers mining bitcoins (Computers that solve tough mathematical problems and verify the transactions get with bitcoins in reward.)

Unlike the dollar, bitcoin is doesn’t have an unlimited supply. Bitcoin supply is limited to 21,000,000 bitcoins, and after that, no more bitcoins will be added to the cryptocurrency ecosystem. That element of scarcity makes it a great store of value. In 2020, when Covid-19 wreaked havoc in the world’s economy. The government printed money, lowered interest and handed it out to the public. The governments controlled the supply and demand. Because of this, we are now in $296 trillion in global debt.

When we make any cashless transaction, the bank verifies and approves it. There is a mediator(bank) in all of our transactions, influencing our spending behaviour and employing creative strategies to sell new financial products to us. Don’t forget about the GFC caused by these creative financial products. Bitcoin solves that issue by using blockchain and recording all transactions in a public ledger. There is no government body involved in approving bitcoin transactions. Bitcoin is the first of its kind to use Peer-to-Peer technology to facilitate instant payment. As mention above, miners get paid in bitcoin to approve transactions. As of June 2021, more than 18,000,000 bitcoins are already mined and are in circulation. Given the limited number of bitcoins, one bitcoin is divisible up to 10 to the power of 8 (hundred-millionths of a bitcoin)

What determines the price of Bitcoin?

Unlike investing in traditional currencies, bitcoin isn’t by the reserve bank or backed by the government. So the conventional influencing factors such as monetary policy, inflation, or economic growth don’t affect bitcoin’s price at all. However, the supply and demand of bitcoin, the cost of producing bitcoin through the mining process, rewards issued to bitcoin miners for verifying transactions on the blockchain, the regulation governing its sale are some factors that can influence bitcoin’s price.

Why is Bitcoin so volatile?

Bitcoin value has historically been quite volatile. Bitcoin’s price can fluctuate when the adoption rate slows. A volatility index has become available to track Bitcoins volatility, known as the bitcoin volatility index. News or events can scare bitcoin users of its utility, such as statements from the government about regulating bitcoin. Other news which shocks investors includes high-profile uses of Bitcoin in drug transactions via silk road that ended in the FBI shutdown of the marketplace in late 2013.

Large holders of bitcoin could tilt the market either way if they were to liquidate all of their bitcoin within a short period of time.

High profile losses raise fear in the market.

Nations with high inflation and their use of Bitcoin to avoid paying high fees make bitcoin an attractive asset to exchange funds across the border.

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