The value of Bitcoin in 2017 was enough to get a lot of investors excited. At the end of the year, Bitcoin was worth nearly $20,000, but at the beginning of the year, it was only about $1,000. Like other digital currencies, however, values can fluctuate by quite a bit. For example, as of June 2018, the value of Bitcoin was about $6,000. Investing in Bitcoin is tricky, and knowing the factors that affect its fluctuation is important.
6 Factors that Cause Bitcoin’s Value to Fluctuate
1. Supply and Demand
When researching the value of Bitcoin and how the conversion rate of US dollars to Bitcoin fluctuates, it helps to know the basics of digital currency and how it is compared to traditional currencies.
Bitcoin is a decentralized currency. It is not issued by a government, a bank, or any other institution.
In contrast, traditional money is issued by a government. In the past, such currencies were often even backed by gold. Note, however, that that is generally no longer the case. For instance, in the United States, President Nixon announced in 1971 that the US dollar would no longer be convertible to gold on international markets.
Bitcoin was created using open-source initiative, and one of the processes that prove that is mining Bitcoins. Essentially, the miners solve very complex mathematical problems, and if they are successful, they receive a certain amount of bitcoin.
The process of mining bitcoin is extremely difficult and time-consuming, and as a result, most people buy and sell bitcoin at the Bitcoin to US dollar exchange rate.
2. Hackers and Disruptions
Digital currencies rely on the concept of cryptography. In theory, Bitcoin is supposed to be impervious to hacks. In 2013, however, Mt. Gox, a bitcoin exchange platform based in Japan, was hacked. This led to a drop in consumer confidence, and by extension, fewer people wanted to buy bitcoin. This caused the value of Bitcoin to fall.
The decline is understandable. If consumers do not have confidence that their investment is safe, they do not buy. It is virtually the same when investing in other types of assets, such as stocks.
In other words, when you invest in something that has a value tied to consumer confidence, you will often go through highs and lows as consumers get excited and lose interest.
3. Official Recognition
Because virtual currencies are relatively new, many governments are leery about their role in the economy. In some countries, including Algeria, Bolivia, and Nepal, selling and buying Bitcoin is illegal.
Most countries have decided to officially recognize Bitcoin or at least permit its use. However, they do not exempt buyers and sellers from the usual taxation. They may require you to report capital gains earned on your tax return using the value of Bitcoin in US dollars.
Either way, when a country officially recognizes Bitcoin, that boosts consumer confidence. It also makes it possible for more people to legally use this as a mode of investment and payment. As a result, the value of Bitcoin usually increases as official recognition improves.
4. Awareness and Public Sentiment
Governments are not the only entities that may be leery about bitcoin. Many people also have a learning curve with this digital currency.
In the first few years after its creation in 2009, bitcoin was confusing for nearly everyone but the most devoted IT specialists or “computer nerds.” Keep in mind that that was just a year and a half after the launch of the first iPhone. At that point, many people were still warming up to the idea of heavy and constant Internet usage.
Over time, people became more aware of the currency. Even if they could not understand the blockchain or the other technology backing this digital currency, they learned its name.
As people began to warm to bitcoin and learn how to use it, that increased demand, which increased prices.
Public sentiment also affects the conversion rate of US dollars to Bitcoin. In some cases, Bitcoin has received a bad rap.
For instance, in many ransomware situations, hackers have demanded to be paid in the currency. When that happens, it casts a bad light on the currency, and people begin associating it with criminal activities.
Again, this would cause demand to fall, and as demand falls, the value of the currency declines as well.
5. Value of the Dollar
Of course, if you are looking at the rate of US dollars to Bitcoin, there are two sides. The value of the dollar also affects this equation.
When the dollar becomes less valuable on the global market, that increases the value of bitcoin compared to a dollar. At the same time, the value of Bitcoin compared to the euro, the pound, or other global currencies may remain steady.
The changes in bitcoin’s price over 2017 is a testament to how volatile the currency can be. If you simply plan to buy Bitcoin and hold on to it, you may be comfortable weathering these changes for the long term. However, if you want to build up a Bitcoin wallet and use the funds for routine purchases, these shifts can be annoying, as they can make it hard to budget and plan ahead. This also affects consumer confidence and can cause prices to go up or down. As this currency becomes more stable, its value should start to increase slowly and steadily rather than the fast ups and downs exhibited over the last few years.
Have you tried investing in Bitcoin? What are your biggest challenges? Let us know in the comments section below.