Factors Determining Cryptocurrency as a Global Currency
A cryptocurrency that uses blockchain technology is called bitcoin. It is a unique asset that integrates the traits of a speculative asset with those of a standard financial asset. The price dynamics of cryptocurrencies have been a controversial subject ever since they gained popularity and more widespread awareness. Bitcoin is created separately from an underlying economy or issuing organisation, indicating that it is not influenced by macroeconomic fundamentals, in contrast to conventional government-backed fiat currencies like the dollar and the euro.
What variables affect Bitcoin’s price, the first decentralised cryptocurrency in the world, and whether it is suitable for use as a reserve currency globally?
The price of Bitcoin is affected by supply and demand, investor and user sentiments, governmental regulations, and media hype. Each of these elements interacts with the others to determine price volatility. More than any other factor, supply and demand determine the pricing of the majority of commodities. Bitcoin’s market value is determined by the number of coins in use and the price buyers are willing to pay. The following variables influence the price of bitcoin:
1. Inelastic Supply
The rate at which new coins are made will be half every four years, guaranteeing that the total number of Bitcoins in circulation never reaches twenty-one million. This will help to curb inflation by limiting the total number of currencies in circulation. As a result, only the creation of new Bitcoins is used to run the network today. But this won’t continue to be the case forever. The rate of Bitcoin generation will slow down and ultimately come to an end around 2040 when the overall number of Bitcoins reaches the maximum limit of twenty-one million.
Although the sheer scarcity that makes Bitcoin so valuable also tends to make its price unstable. As a result, Bitcoin is considered to have an inelastic supply because the percentage change in its supply is smaller than the percentage change in its price. The rate of issuance and hard-capped quantity of Bitcoin stay constant, regardless of the amount of energy used in mining it.
2. Market Forces of Supply and Demand
Bitcoin’s price is influenced by supply and demand. Bitcoin prices increase in response to increased demand and decline in response to decreased demand. Given that there are only a limited number of Bitcoins available, demand must keep pace with inflation to maintain price stability. The supply of virtual money is exogenous, hence it has a minimal impact on how prices are formed.
Due to its limited supply and steadily increasing demand, the price of Bitcoin will always rise over the long term. Prices will rise until demand is reduced if demand increases and supply does not follow suit. Even if the supply of Bitcoin is known, demand will continue to be the primary factor influencing pricing in the future, therefore investing in it will remain exciting and volatile.
3. Investment Attractiveness
A form of digital money known as cryptocurrency can be used as a store of value and a medium of exchange. Although it is only now becoming popular as a valid payment mechanism, during the past ten years it has already become recognised as a new asset class. Given that Bitcoin was only recently founded, several distinct factors affect the demand for investments in the currency.
One of the potential factors influencing the price of Bitcoin is its widespread use. Simply said, increased interest in a currency combined with an easy way to invest in it causes demand to increase and prices to rise. This is a common market response to a seemingly straightforward potential for profit, which is why investors are drawn to it as an asset.
4. Easy Accessibility
Everyone may access and use the blockchain in real-time to inspect and use all the information about the Bitcoin money supply that is stored there. The Bitcoin protocol cannot be changed or controlled by any person or organisation since it is cryptographically secure. Because of this, it is possible to rely on the neutrality and transparency of the Bitcoin core. Furthermore, we cannot completely rule out the likelihood that investor speculation is affecting the price of Bitcoin. Therefore, speculative Bitcoin trading is not necessarily a bad thing because it can also have positive effects like absorbing excess risk from risk-averse people and bringing liquidity to the Bitcoin market.
A significant component of Bitcoin’s reputation is the security that the system offers to its users and when it is used in transactions. Cybersecurity is the main worry because Bitcoin transactions are carried out exclusively online. The Bitcoin system might be completely disrupted by cyberattacks, leading to its eventual collapse. Being a digital currency, Bitcoin is more vulnerable to cyberattacks than conventional currencies. On the other hand, the good news about the system’s security, like an upgrade to safer network software, makes it more alluring to investors. On the other hand, the good news about the system’s security, like an upgrade to safer network software, makes it more desirable to investors.
Bitcoin falls short on all three counts when it comes to being a means of trade, a store of value, and a unit of account. Consumers face a considerable short-term risk due to its volatility, which is significantly higher than that of widely used currencies. excessive volatility that resembles an investment more so than a currency, Bitcoin’s value can fluctuate dramatically; for example, it may reach a high position at one point in time and then drop to less than half of that level two months later.
In addition, if sufficient anti-money laundering and counter-terrorist financing regulations are not in place, crypto-assets may be used to hide illegal earnings, finance terrorism, and evade taxes. As a result, the financial system, fiscal balance, partnerships with other nations, and correspondent banks could all be in danger. As a result, despite being the most widely used cryptocurrency, Bitcoin cannot be used as money due to its extreme price fluctuations. It resembles an investment and a virtual payment system, but not a form of money.