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The interest in bitcoins has increased in line with the spike in its prices. In the last 1 year, price of bitcoin has increased over 800%. Its prices have also been volatile, with a big dip in prices this week itself. According to experts, this plunge came because a set of miners called off a forking that was to happen this week (read about forking here). However, bitcoin prices move up or down for many different reasons. Here’s a look at some of the reasons behind bitcoin price movements.
Supply and demand
Experts say the price of cryptocurrencies is unpredictable and it depends on demand and supply. “Price depends on the demand for buying and selling the cryptocurrency, matched with the supply of the cryptocurrency,” said Benson Samuel, chief technology officer and co-founder, Coinsecure. For example, no more than 21 million bitcoin can be created. “The fact that there are only a fixed number of bitcoin that will ever be created, ensures that there will never be inflation with the currency and that if there is demand and the supply is limited, the price of bitcoin will continue to go up,” said Samuel. Many ask whether the current valuation is hype. “It is difficult to categorize something as hype when bitcoin is not a return-generating asset. Its price is driven by demand, being a limited-supply good,” said Sumanth Neppalli, cryptocurrency and blockchain analyst, Zebpay, an app-enabled bitcoin exchange.
Forking called off
Another forking was expected this week, which was called off. Experts say that the plunge in bitcoin prices was due to the cancellation of an upgrade. “Perhaps frustrated by the cancellation of technology update of the original bitcoin blockchain, which was announced recently, many users are switching to bitcoin cash, which allows for bigger block sizing, giving ample capacity for everybody’s transactions, as opposed to bitcoin’s cap at 1 MB blocks,” said Daniele Bianchi, assistant professor of finance, Warwick Business School, UK. Bianchi is currently researching crypto-currencies. Bitcoin cash is a cryptocurrency that was born from forking in August this year.
Unlike in stock market, where you can determine the change in prices due to the change in the fundamentals, in cryptocurrencies it is mainly due to sentiments. “The high volatility of cryptocurrencies is driven mainly by investor sentiment rather than by a change in fundamentals. We are not arguing that there are no fundamentals, rather there has not been any meaningful interpretation using traditional fundamental analysis,” wrote David Lee Kuo Chuen, economics professor of fintech, Singapore University of Social Sciences, in his paper ‘Cryptocurrency: A New Investment Opportunity?’ carried in Journal of Alternative Finance, which was shared with Mint.
Speculation and news
In the past, price movement has happened due to geopolitical issues, breaking news, technology advancements and security breaches too. “Intentional devaluation, coupled with capital controls spurred increasing demand with many Chinese investors looking for sending their money off-shore in a flight-to-safety type of dynamics,” said Bianchi. There is speculative news on the wider adoption of bitcoin, not only as a payment method but also as an investment vehicle, increasing demand, and pushing prices further.
What it means for you
There are no definite reasons yet for bitcoin price movements. Multiple factors determine price fluctuation and it is very volatile. If you are looking to invest in it, the basic rule of investment applies here too—if you don’t understand a product well, stay away from it. If you still want to invest, first educate yourself about the investment instrument and then take the next step.