As is the case with any currency, virtual or fiat, the value of bitcoin is often strongly affected by world events.
The effect of world events on the value of bitcoin became starkly clear during the summer of 2015 when a severe financial crisis in Greece drove bitcoin's price in an upward trajectory almost overnight. At the time, speculation ran rampant regarding whether the price increase was due to more Greeks buying bitcoin or simply people active in the space who decided to go long as a result of recent events. Either way, one fact cannot be denied. A bitcoin price increase did coincide with the Greek financial crisis1.
Moving into 2017, financial experts are already predicting that the value of bitcoin will likely increase and could be strongly affected by global events.
Factors that Drive Bitcoin's Price
Similar to traditional fiat currency, the price of bitcoin is largely driven by the principles of supply and demand. Unlike traditional fiat currency, bitcoin is not controlled by a central bank. Instead, the cryptocurrency relies on a mining process in which blocks of transactions are validated by miners competing to solve puzzles in 10-minute increments. As a type of reward, the first miner to solve the mathematical puzzle and clear the transaction receives 25 new bitcoins.
Bitcoin Supply Set to Slow in 2016
When bitcoin was first invented by the mysterious Satoshi Nakamoto in 2008, the program behind it was designed in such a way that the reward amount would be halved approximately every four years. The goal of this was to keep inflation of the cryptocurrency in check. The previous halving took place in July 20162.
Demand for Cryptocurrency on the Rise
While supply is set to slow, demand for bitcoin is steadily increasing around the globe. This has proven to be particularly true in China, where the country's own currency is weakening and the economy is not growing a before.
The price of bitcoin has surged over the last few months, which now places the cryptocurrency on track to achieve its best price record. Increasing demand in China is largely responsible for the uptick in price. In fact, China is now the leading buyer of bitcoin, with 8 out 10 transactions taking place in yuan3.
Other leading bitcoin buyers include the US, Europe, Brazil, and India. The cryptocurrency is also continuing to gain new supporters around the globe. Last year, bitcoin venture capital investors crossed boundaries into new countries for the first time. Those countries include the Philippines.
Bitcoin Bans Could Drive Further Demand
While many countries may now be welcoming the presence of bitcoin, other countries have a far less favorable stance on the virtual currency. Taiwan became the first country to out and out ban bitcoin in 2013, while Russia has banned related websites, and Thailand followed suit4. China has also banned similar accounts. The top online retailer in China, Alibaba, banned the use of bitcoin on its shopping network in 20145. Such prohibitions could be viewed as having the potential to stifle the growth of the cryptocurrency, but it's also likely that bitcoin could experience a surge in popularity in response.
As the global economy continues to slow, currency wars heat-up, and world war doesn't seem to be that far away, more people around the world have begun to seek other asset classes in which to invest as a way to maintain the value of their assets. Bitcoin offers a simple, but highly fluid and effective method for doing just that.
1) Greek crisis stokes bitcoin prices higher
2) Record highs predicted for bitcoin in 2016 as new supply halves
3) Bitcoin price nears $500 - How high can it go amid China-fuelled surge?
4) Bitcoin banned in Thailand
5) Alibaba bans Bitcoin amid China crackdown