Bitcoin’s Future is Dependent on These Five Factors
While cryptocurrencies are still considered a relatively more recent technology, Bitcoin, the first-ever cryptocurrency, came into existence more than a decade ago, in January 2009. The birth of Bitcoin also sparked the birth of a whole industry – the cryptocurrency industry- and several thousand altcoins.
With over 40 million Bitcoin users in America alone, the global Bitcoin market capitalization stands at over $1 trillion. Decentralization, enabled by blockchain technology, has played a key role in this exponential success and growth of Bitcoin, as it is for other cryptocurrencies.
Now, as several major companies such as Tesla and Paypal have made significant investments in Bitcoin and other cryptocurrencies, there is no doubt that Bitcoin will soon become the most popular currency of choice for international trade. However, given its highly volatile nature, few experts have also been critical of this cryptocurrency.
But even as prices continue to travel in both upward and downward directions each new day, many investors and crypto enthusiasts are certainly optimistic about Bitcoin’s future as an asset class and more. Considering that, the next few years, or the next decade, is critical in the development and existence of Bitcoin.
Here are five factors on which the future of Bitcoin depends.
In light of their rising popularity, regulators are still discussing how to characterize Bitcoin and other cryptocurrencies. The government of India, for example, has not outright banned cryptocurrencies; but, a formal regulatory framework is yet to be established, leaving millions of crypto investors and enthusiasts in the country unsure whether or not to invest.
In 2017, when China, the world’s largest market for cryptocurrencies, took very tough decisions on Bitcoin and decided to close several trading platforms, the price of Bitcoin fell dramatically. Again, in February 2018, the cryptocurrency market saw a 100 billion dollar drop due to announcements of potential regulatory changes by various Asian governments.
Later, the crypto market and the prices of various cryptocurrencies, especially Bitcoin, began rising only when the Japanese government announced their decision to officially recognize Bitcoin as legal tender.
Several instances like these prove that despite the very nature of Bitcoin being decentralized, government regulations can directly affect the price of Bitcoin. Essentially, this means that if there is concern about a specific government statement or decision, the price of BTC can fall. Therefore, one cannot overlook the influence of government decisions on the future of Bitcoin.
Changes to governance in the Bitcoin community
Even though Bitcoin is a decentralized currency, it does require some decisions on how it will function and evolve from time to time. These decisions have a direct bearing on the price of Bitcoin. Bitcoin transactions are verified by software created by developers and run by miners. Developers need the approval of more than 50% of global miners to modify the software that mines and authenticates transactions. Getting this support and approval leads to the creation of a “fork” – “a radical change to a network’s protocol that makes previously invalid blocks and transactions valid, or vice-versa.” (Investopedia)
If, however, a consensus cannot be reached, which was the case with the decision relating to the increase in block size in 2017, a hard fork will occur, leading to creating two separate blocks according to different rules. This is how Bitcoin Cash came to be in August 2017. The price of Bitcoin has often been negatively affected by such fork periods in the Bitcoin community.
Thus, governance of Bitcoin by a community in the process of finding consensus is undoubtedly an indicator of instability that will impact the long-term and middle-term prospects of the future of the currency. The Bitcoin Blockchain and the entire ecosystem are affected by decisions made by the community, hence, this can’t be ignored, even though, after the fork, the trend was upward.
According to several studies, the media has had the most significant impact on Bitcoin’s price and the prices of other cryptocurrencies. Indeed, increased media attention has led to a greater understanding of cryptocurrencies and Bitcoin among the general public. And this has directly affected the ability of cryptocurrencies to attract new users.
Positive media coverage is one of the main factors driving Bitcoin’s price action over the years. This was most evident in the early days of Bitcoin when mainstream media began reporting on the currency and caused a short spike and crash in price. As media coverage grows and other factors are introduced, it is harder to isolate the effect of the media alone. Historically, however, higher prices have resulted from positive media coverage of Bitcoin, while negative coverage lowers prices.
Supply and demand
Like several other cryptocurrencies, Bitcoin also follows the law of supply and demand. The Bitcoin supply can be likened to Gold since there is a maximum number of Bitcoins that can be put into circulation, just as there is a known total amount of gold on Earth.
Just like how gold miners must remove gold from mines to transport it to sales terminals, Bitcoin miners must do the same to create new Bitcoins.
To accomplish this, they must use their computers’ computing capability to solve a complicated mathematical equation. Miners will be compensated in Bitcoins for solving this mathematical puzzle, thereby increasing the number of Bitcoins available on the market.
In light of this, it has been observed that user acceptability is one major factor that has affected Bitcoin’s price action. Typically, the popularity of a currency will increase its price, and low demand will cause a drop in value.
Given how Bitcoin has now become popular among individuals, businesses, and investors to make online transactions, the price of bitcoin is also rising due to high demand and limited supply.
If this trend continues, it is reasonable to expect that this will positively impact Bitcoin in the future, where its price increases.
When miners process blocks of transactions, new Bitcoins are added to the market, and the rate at which new currencies are introduced is slowing down over time. The total number of Bitcoins allowed by the system also has a direct influence on supply. In the case of Bitcoin, its total quantity is capped at 21 million, which means that mining operations will stop producing new bitcoins once this amount is achieved.
Typically, cryptocurrency miners employ excavators for mining, but as time goes on, this method becomes harder. As a result, the price of Bitcoin in the future will undoubtedly be affected if the cost of extracting virtual money increases.
While these are only some of the major factors, there are also other factors relating to technological improvements within the Bitcoin ecosystem, manipulation by major players, and more that will affect the future of Bitcoin. Indeed, for many investors, the volatility of Bitcoin makes for an ideal trading environment, and most of them are expecting this continues in the future as well.