Bitcoin Price Fluctuations, Explained
Bitcoin is indeed the first and the most popular cryptocurrency. As with any currency, the price of Bitcoin also keeps on changing. What’s more fascinating is the fact that it fluctuates more than any fiat currency.
Now one may raise the question, how does it matter? Well, to be true, it does not make much difference. Except, to the ones who invest in it. So let’s put some light on why the bitcoin price fluctuates and how to make a smarter, risk-free investment.
The Peg Effect
For any fiat currency, the value of the currency is pegged to commodities. Whereas, for bitcoin, it is not pegged to any physical product or service. In simple words, no product or service is linked solely to bitcoin, which can define its price.
A common notion is the payments made for purchases through bitcoin, which is wrongfully associated with the peg effect. What usually is paid in bitcoin is the exchange value of the product concerning the fiat currency value.
How Does the Pegging Effect Work?
Once a currency is pegged to any commodity, frequent and huge fluctuations can create an imbalance in the world economy. Higher exchange value means it gets tough for buyers to buy and sellers to sell in the international market.
Demand and Supply
Just like different country’s economies work on the demand and supply principle, bitcoin also operates on demand and supply. The higher the demand is, the higher the value of bitcoin rises.
How Do Demand and Supply Impact Value
With increased demand, the holder or the exchange draws an upper limit for bitcoin’s value. Similarly, with increased supply, the exchange draws a lower limit for its value. The value of the bitcoin is decided in between these limits.
Another factor that makes a difference to its value in the market is the ratio between the selling price and the buying price. For every set of bitcoins, both the buyer’s and the seller’s quote a price. Experts at www.harvex.io say that bitcoin price that mediates the gap is decided by the exchange that is involved in the sale and purchase. For example, if the seller proposes a selling price of ￡400 and the buyer negotiates to ￡350, a price somewhere around ￡370 and ￡380 may be set for the bitcoin by the exchange agency that is involved.
The Limit Imposed
The greatest character possessed by bitcoin is the limit imposed on the total number of bitcoins that can co-exist in a network. Currently, the limit is specified at 21 million bitcoins.
How Does This Limit Effect?
This is pretty easy to understand. Since the total number of bitcoins that can exist in a network is set to 21 million, supply is limited while keeping the demand as a variable. As the demand grows, the bitcoin price takes a huge hype, and vice-versa.
As long as bitcoin is not globally accepted, its value will keep on fluctuating with greater limits. In order to stabilise it, people need to invest in it.