Bitcoin, the most popular and valuable cryptocurrency, has been on a roller coaster ride in the past year. The price of bitcoin has fluctuated wildly, reaching a record high of over $60,000 in November 2022, before plunging to below $30,000 in July 2023. What are the factors behind these dramatic swings? And how do world politics influence the demand and supply of bitcoin?
Bitcoin and the US Dollar
One of the main drivers of bitcoin price is the strength of the US dollar, which is the world’s reserve currency and the dominant medium of exchange for international trade and finance. Bitcoin is often seen as an alternative to the dollar, especially by investors who are wary of inflation, devaluation, or government interference. Therefore, when the dollar weakens, bitcoin tends to rise, and vice versa.
Bitcoin and Global Events
Another factor that affects bitcoin price is the occurrence of major global events that have political, economic, or social implications. These events can create uncertainty, instability, or opportunity for bitcoin users, investors, or traders. Depending on the nature and impact of these events, they can either boost or hurt bitcoin price.
For instance, in August 2023, bitcoin soared to above $50,000 after a landmark court ruling in China recognized bitcoin as a legal asset that can be inherited. The ruling was seen as a positive sign for the legitimacy and acceptance of bitcoin in China, which is one of the largest markets for cryptocurrency. The ruling also contrasted with China’s previous crackdown on cryptocurrency mining and trading activities, which had caused bitcoin price to plummet in June 2023.
On the other hand, in September 2023, bitcoin dropped to below $30,000 after a massive cyberattack on several major cryptocurrency exchanges. The attack resulted in the theft of millions of dollars worth of bitcoin and other cryptocurrencies from users’ accounts. The attack also exposed the vulnerability and security risks of cryptocurrency platforms and eroded the confidence and trust of many investors and users.
Bitcoin and Innovation
A third factor that influences bitcoin price is the level and pace of innovation in the cryptocurrency industry. Innovation can take various forms, such as technological improvements, regulatory developments, or new products and services. Innovation can affect both the supply and demand sides of bitcoin.
For example, on the supply side, innovation can affect how new bitcoins are created and distributed. Bitcoin operates on a decentralized network of computers that use complex mathematical algorithms to verify transactions and create new bitcoins. This process is known as mining and it requires a lot of computing power and energy. As more miners join the network, the difficulty of mining increases and the reward for each new block decreases. This creates a natural limit to how many bitcoins can be produced over time.
However, innovation can also change how mining is done and how efficient it is. For instance, in October 2023, a Canadian company called Hut 8 Mining announced that it had successfully mined bitcoins using renewable energy sources such as solar and wind power. This reduced its carbon footprint and lowered its operational costs. This also demonstrated that bitcoin mining can be more environmentally friendly and sustainable than previously thought.
On the demand side, innovation can affect how bitcoins are used and exchanged. Bitcoin is not only a digital currency but also a platform that enables peer-to-peer transactions without intermediaries or central authorities. Bitcoin also supports smart contracts, which are self-executing agreements that can facilitate various applications such as decentralized finance (DeFi), non-fungible tokens (NFTs), or digital identity.
However, innovation can also introduce new challenges or opportunities for bitcoin users and investors. For instance, in November 2023, BlackRock applied for approval from the US Securities and Exchange Commission (SEC) to launch a bitcoin spot exchange-traded fund (ETF). A bitcoin ETF would allow investors to buy and sell shares that track the price of bitcoin without having to own or store the actual cryptocurrency. A bitcoin ETF would also increase the accessibility and liquidity of bitcoin and attract more institutional and retail investors.
However, the SEC has not yet approved any bitcoin ETFs, citing concerns about market manipulation, fraud, and volatility. The SEC’s decision is expected to have a significant impact on the future of bitcoin and the cryptocurrency industry.
Conclusion
Bitcoin price is influenced by a variety of factors, ranging from macroeconomic conditions to micro-level events. World politics play a crucial role in shaping the supply and demand of bitcoin, as well as its perception and acceptance by the public and regulators. Bitcoin price is also affected by the innovation and development of the cryptocurrency industry, which can create new challenges or opportunities for bitcoin users and investors. As bitcoin becomes more mainstream and integrated into the global financial system, its price will likely reflect the complex and dynamic interactions of these factors.
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