Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by governments, therefore, monetary policy, inflation rates, and measures of economic growth that normally affect the value of any fiat currency do not apply to the Bitcoin price-setting system.
If you want to understand the way cryptocurrency prices move, here are 4 main factors that affect their prices, up and down. a report Detailed American “investopedia” site interested in investment affairs.
Supply, demand and scarcity
The Bitcoin currency is affected, like other currencies as a whole, by the process of supply and demand, which is a major economic principle, so if the demand for Bitcoin decreases, its price decreases, and vice versa, if the demand is high, the value of Bitcoin will increase.
Also, the price of Bitcoin is associated with the element of scarcity, which raises prices, and is one of the factors that led to the price of Bitcoin rising to its highest levels. Bitcoin production stops at 21 million BTC which is relatively low compared to other digital currencies, while demand has increased in recent years.
speculation
Speculation is one of the factors that greatly affects the price of Bitcoin and causes it to rise or fall sharply.
Speculators aspire to make quick profits by trading in bitcoins, so they buy and sell them very quickly and frequently, which leads to short-term fluctuations in the price.
In general, fast and strong fluctuations are among the things that characterize digital currencies and open up the appetite of traders, because they create opportunities to earn money through short-term buying and selling, but they naturally come with higher risks.
organizational developments
Some countries still do not recognize bitcoin, there are some countries that ban it and ban its use.
Cryptocurrency prices tend to respond quickly to any decisions regarding legalization or prohibition, for example, when Japan announced that Bitcoin was considered a legal tool for trading, its price rose strongly in just 24 hours. Japan, which previously represented only 1% of Bitcoin trading volume, after its decision to legalize dealing in cryptocurrencies, reached 6%, and even Japan achieved 55% of global trading volume in some days.
While another country, such as China, imposed very strict measures to prevent dealing with bitcoin, which had a very negative impact on the price of the currency at the time.
Political events
Political events in the world that seem unrelated to cryptocurrencies can significantly affect their prices.
Digital currencies benefit from the shaking of confidence in official currencies, for example, the occurrence of unrest in some countries made people use digital currencies as a substitute for the traditional currency that governments deal with for fear of material loss that occurs to them and the lack of confidence of investors in putting paper money because of the political and economic turmoil in these countries .
These cryptocurrencies are usually seen as assets as an alternative to traditional currencies backed by governments, so when investors lose confidence in their fiat money due to economic or political developments, they can turn to bitcoin, which drives up prices.
Some experts believe that digital currencies can replace real holdings of gold as a safe haven for value when things turn for the worse, and although the World Gold Council believes that these assets are too volatile to perform that task, analysts are likely to rise with the turmoil of global political conditions.