Bitcoin and other digital cryptocurrencies have risen in popularity throughout the world and have become a lucrative option for many investors. This type of currency is not regulated by governments and lets people make anonymous and secure transactions. Many businesses have also started accepting bitcoin in recent years, but still, cryptocurrencies have not become the norm yet.
If you are looking to invest in cryptocurrency then the first thing you should do is find a reliable crypto trading platform. Once you find a good trading platform, it’s time to study the fluctuation in prices. Investments in bitcoin and other cryptocurrencies carry with them the risk of sudden drops in value.
The sudden dips and rise in the value of these currencies are referred to as the volatility of the coin. Bitcoin has always been one of the more volatile options out there. This year, the price of bitcoin has dipped over 29% due to the decision of Chinese financial regulators to ban the use of cryptocurrencies by banks and other financial institutions.
In this article, you will get a glimpse of how these currencies work, and why cryptocurrency prices fall off. First, let’s clear the basic concepts of digital currencies.
What Is Cryptocurrency And How Does It Work?
As stated earlier, Bitcoin and other cryptocurrencies are not connected to any governments and give the owner complete control over their transactions. Also, it is completely anonymous and there are no traces of your transactions for security purposes. These currencies are stored in digital wallets, which come in both offline and online options.
Cryptocurrencies run on a protocol termed Blockchain. This term can refer to the original Bitcoin Blockchain or the various iterations of it that are used by coins like Ethereum and others. The blockchain is spread through multiple computers and its purpose is to manage and record transactions made with the virtual currency.
Bitcoins and other currencies are digitally signed whenever they are transferred from one owner to another. Because of the volatility of these coins, many countries have clamped down on them. Also, virtual currencies have been used to evade taxes, and hence every bitcoin transaction over $10,000 has to be reported to mitigate this problem.
What Determines The Value Of Bitcoin?
As these currencies are not regulated by governments, inflation rates and economic factors do not influence their value. Take a look at the factors that affect the value of virtual currencies.
Market Demand and Supply Chains
Cryptocurrency protocols allow new currencies to be generated only at a fixed rate. As new bitcoins are generated, the rate of coin production decreases over time. This creates scenarios in which demand increases at a higher rate than production, and this drives up the price.
Supply can also be affected by the number of total bitcoins that exist. This is limited to 21 million, and once this number is reached, mining will not be able to generate new currency. In December 2020, 18.587 million had already been generated. Once the limit is reached, the price depends upon its practicality and the popularity of competing coins.
Cost of Mining
When cryptocurrencies are mined, the mining processes require initial investments and the cost of electricity consumption. Mining relies on problem-solving using specialized mining rigs that consume a lot of power. The more problems that get solved, the more power demand increases.
The algorithm of bitcoins allows just a single block to be mined at any specific time. As the numbers of miners increase, the problems become more difficult, and as a result, more expensive.
Competition from other Cryptocurrencies.
Bitcoin is one of the most well-known virtual currencies, but there are many other coins out there. The increasing number of options is a great deal for investors, as the price goes down with more competitors. Some of the major competitors of Bitcoin include Ethereum, Tether, Binance Coin, Cardano, among many others.
Internal Governance
Cryptocurrencies rely on being maintained by developers and miners to ensure the stability of the blockchain. Transactions are limited to about three per second when using bitcoin software. Investors and miners are shifting to other currencies because of this limitation, leading to price falls.
The community has prescribed a few modifications to the transaction system to increase the concurrent number of transactions.
Social Media and Speculation
Many owners have sold their assets due to speculations in social media. These posts and articles generate panic among the owners and lead to the sudden selling of shares. As a result, the price of cryptocurrency drops down suddenly.
The price also decreases when there is a sudden increase in the volume of coins being sold in the market. Cryptocurrencies are unregulated and decentralized, and this results in more people shifting from conventional money to virtual currencies, driving the price up.
Government Regulations
The increase in the usage of cryptocurrencies has led to new government regulations on them. In some countries, it is debated whether cryptocurrencies are a commodity or a security. This confusion and irregularity have prevented the coins from conventional usage, even with all the capitalizations in the market.
Many financial services have also started to use bitcoin as an underlying asset. This provides access to virtual currency to people and investors who are not able to afford actual cryptocurrencies.
Final Words
Investing in Bitcoin and other cryptocurrencies is quite a lucrative option to many people. But with the increasing volatility and value of these coins, it can be concerning to try and deal with it. Many people see the rise and fall of cryptocurrencies as a part of the normal procedure, but in truth, there are several factors that affect the crypto price fall.
The recent huge drops in the value have been caused by a combination of several factors that came together. Some of these include excitement about new coins, social media influences, China’s crackdown on the usage of crypto services by financial organizations, and many more. The response to these events by investors was to sell off their assets violently, which led to huge falls in crypto prices.
