The price of any asset is always impacted by a combination of factors. Unlike traditional financial assets, bitcoin has historically had its own set of factors that affect its price. Do things look different now? Let’s find out.
Basic factors: supply and demand
The price of Bitcoin heavily depends on fluctuations in supply and demand, just like other assets. However, unlike fiat currency measures, bitcoin’s supply is always known and its hard cap is fixed at 21 million coins.
Demand for bitcoin has always been high on the cryptocurrency world’s agenda – which is why BTC adoption is so talked about. Higher demand will lead to an increase in its price, especially when institutional investors get involved.
For example, when companies and institutions started buying and holding bitcoin in early 2021, its price increased significantly as demand outstripped the rate at which new coins were being put on the market for sale, resulting in a decrease in the total available supply. of cryptocurrency. .
Its price will go down, however, if there are more people who want to sell it.
The news influences investors’ perception of Bitcoin in important ways.
Despite extreme volatility in the price of bitcoin, the year 2021 stands out for its unprecedented adoption by both institutions and corporations.
For example, Grayscale Bitcoin Trust had an average AUM of $31 billion and an average Bitcoin holding of 650K in 2021.
Bitcoin price is also affected by regulatory developments. Changes in regulation may encourage or discourage investment in BTC or its use, which in turn leads to an increase or decrease in its price.
Here’s how the price of bitcoin superimposed on regulatory events in 2021:
News Indirectly Related to Bitcoin
Let’s consider an example of how indirect news events such as reports about a political situation in a country somewhere in the world can substantially affect the price of BTC.
On January 2, 2022, a week-long uprising began in Kazakhstan. Most people had not realized the significance of this event for the cryptocurrency market. In recent years, Kazakhstan has become the second largest bitcoin miner in the world based on hash rate. It accounts for about 18% of the global hash rate and is only surpassed by the United States.
So, with the news of an uprising, it took about 24 hours for the cryptocurrency market to react, and the price of BTC dropped a combined 13.1% from Jan 2-8.
BTC increasingly resembles traditional assets
In theory, traditional market-related news, such as reports on the macroeconomic environment or central bank monetary policy decisions, should not affect cryptocurrencies due to their decentralized nature. However, the current trend suggests otherwise.
Global news sentiment has a big impact on stock returns around the world, according to World Bank research. This effect is not reversible in the short term, suggesting an underlying source of sentiment-driven asset price fluctuations.
Below is the Federal Reserve Bank of San Francisco’s Daily News Sentiment Index, which provides an overall measure of economic sentiment by analyzing news articles:
Although Bitcoin is not a traditional asset, it seems that general news sentiment influences its value.
Here’s what the bitcoin price chart looks like when combined with the news sentiment index for the same period:
Recent data on the correlation of Bitcoin and major stock indices also suggest this.
Historically, crypto assets have not shown a strong correlation with major stock indices. In the most recent data from Coinmetrics, however, the daily correlation between bitcoin and the S&P 500 jumped to 0.47 on Jan 28, 2022, indicating a close correlation.
As the cryptocurrency market matures, new trends emerge that we haven’t seen before. Initially a marginal asset, bitcoin is now increasingly acting like a traditional asset, sensitive to the same market forces that affect these markets. In addition to news about cryptocurrency regulations and institutional adoption, the price of bitcoin is affected by changes in general economic conditions and world events that impact traditional markets.
This is a guest post by Mike Ermolaev. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.