At the beginning of April 2020, Bitcoin had climbed back to being valued at more than $6,000. Although this was a far cry from its all-time highest valuation of $20,000, it was still an improvement from its most recent plunge. This has led many investors to ask what are the main factors affecting the price of blockchain technology’s flagship cryptocurrency in 2020?
Given the currently situation that the whole world is faced with, it comes as no surprise that Bitcoin suffered its worst price plunge in recent history. Forbes indicates that this was further compounded by leveraged trading as well as recent DDoS attacks against cryptocurrency markets. "We're seeing a lot of leveraged trades in the crypto markets and that leverage can lead to extreme corrections during periods of high volatility," explains data scientist Geoff Watts. "On March 12th, Bitcoin fell below $4,000. At one point, due to a backlog of liquidations, the price of Bitcoin on (crypto exchange) BitMEX was over $300 below the price on other exchanges." BitMEX lets its users trade with leverage up to a ratio of 100:1, which can amplify gains as well as losses. The crypto exchange also experienced DDoS attacks, which caused outage during Bitcoin’s flash crash, further contributing to the volatility.
The Decline of Fiat Currency
The decline of fiat currencies is arguably one of the main, original goals of Bitcoin. While fiat currency won’t go out of fashion anytime soon, it can't be denied that more and more people are turning to digital currencies for safety and security. Even before Bitcoin revealed the extent of its volatility, many have spoken out about preparing for the imminent financial transition to digital currencies. A feature on Bitcoin by FXCM explains how the perceived decline of fiat currency previously prompted several prominent figures in finance and tech to make bold predictions about the rise of cryptocurrency’s valuation. For programmer and anti-virus software pioneer John McAfee for instance, Bitcoin will be valued at $1 million by 2022, making venture capitalist Tim Draper’s $250,000 Bitcoin valuation by 2022 conservative in comparison. While it’s true that these predictions could very well be fueled by their own investments in Bitcoin and other cryptocurrencies, traditional money is slowly but surely getting less and less popular. The growing popularity of digital options for fiat currencies such as Paypal, Samsung and Apple Pay technology, as well as other contactless payment methods, as well as using them, people are less afraid of using new types of payments, also contributes to this. One of the problems with Bitcoin is the long confirmation of transactions, which makes it difficult to use it as cash for payments in stores, but there is already a solution in the network, such as the Lightning Network.
Increasing Cryptocurrency Adoption, Development, and Regulation
Business Insider notes how almost 2,500 different cryptocurrencies are in existence, amounting to an estimated $250 trillion being traded around crypto exchanges. The valuations of these cryptocurrencies range from mere cents to thousands per digital coin, with Bitcoin dominating the markets in terms of both trading volume and valuation. Even as the value of these digital currencies constantly fluctuate, there’s no doubt that blockchain-based currency itself is on the rise, as any cryptocurrency exchange can attest to the fact that even in the middle of Bitcoin’s plunge, trading volume is going up. Although technically in competition with Bitcoin, these thousands of different cryptocurrencies are also promoting the acceptance and regulation of digital exchange.
This deflationary event happens once every 210,000 blocks on the Bitcoin blockchain. The block reward for mining Bitcoin gets cut in half approximately every four years, and it’s slated to happen again this May. Coin Telegraph details how it will cut the 12.5 block reward down to 6.25 — and that the same has already happened to its two other versions: Bitcoin Cash and Bitcoin SV. This event is not under the control of any one person or financial institution, as the halving is part of Bitcoin’s code. In fact, it’s recognized by traders as Bitcoin’s underlying mechanism to prevent the unethical inflation that can easily occur in fiat currency, and as a way to preserve the long-term value of the flagship cryptocurrency. By halving the block reward, Bitcoin gets harder to mine as it approaches its 21 million cap, which is also part of its code. As this is the year when the next halving occurs, some experts speculate that Bitcoin could reach a $20,000 valuation by the end of the year.
Global socio-economic events, the law of supply & demand, the decline of traditional currency, and the burgeoning acceptance of digital payment methods all contribute to how Bitcoin’s value fluctuates. And while these are the main factors to watch for, they’re far from the only factors affecting this fluctuation. If you’re planning to invest in or against Bitcoin, the best strategy is to keep yourself informed about anything that has to do with fiat and cryptocurrencies, global events, and new regulatory moves.