Four factors driving the price of Bitcoin
November 13, 2017 8.59pm SAST
The price of Bitcoin has slumped after a failure to agree on a new direction. Shutterstock
Alicia (Lucy) Cameron and Kelly Trinh
The price of Bitcoin has dropped to around A$8,000 in the last few days, after almost hitting A$10,000 in the past month, and rising over 1,850% since 2015. All of this shows how volatile the currency is, prompting the question, what leads to such huge movements?
Our ongoing research reveals four factors that affect the price of Bitcoin. These include media hype and uptake by peers, political uncertainty and risk (such as the election of Donald Trump or the vote for Brexit), moves by governments and regulators, and the governance of Bitcoin itself.
It is likely the last factor that has driven the latest drop in the price, as a proposed Bitcoin split (or “fork”) failed to gain support from developers towards the end of last week. The split would have doubled the number of coins in circulation (as previous splits have) and increased transaction speed.
Analysis of the price of Bitcoin shows that positive media coverage is one of the main factors driving the price.
Positive media coverage of new technologies causes a well-known hype-cycle – a peak of hype is followed by a “trough of disillusionment”.
This was most apparent in the early days of Bitcoin, when mainstream press started to report on the new currency and caused a number of short price spikes and collapses. As media coverage increases and other factors are brought in, it is harder to distil the effect of the media alone.
Something similar happens when high-profile companies go public, as investors “pile in” and the value rapidly increases from a low base. Think of a company like Twitter, which saw a huge sharemarket “pop” when it went public.
The economic crisis in Greece in 2015 was followed by reports of increased buying of Bitcoin by Greek citizens wishing to protect their wealth. This did not seem to affect the price of Bitcoin on global markets, however, which remained steady between A$300 and $400 for most of that year.
But nervousness about the national referendum for Britain to leave the European Union (Brexit) on June 23 2016 did lead to an increase in the price of Bitcoin alongside a decrease in the value of the British pound.
The pound started plummeting around May 20 2016. By July 25 it was more than 10% below its pre-Brexit value. For the same period the price of Bitcoin increased by over 65% (from £302 to £502).
The election of Donald Trump as US president was also followed by two months of steep rises in the price of Bitcoin. Many attributed this to uncertainty in the US economy.
Two events in particular highlight the impact regulations can have on the price.
The announcement that Bitcoin would be considered legal tender in Japan pushed the price of Bitcoin up by 2% in just 24 hours, and increased the price globally by 160% for the next two months.
China’s decision to shut down several Bitcoin exchanges and ban initial coin offerings (a form of crowdfunding often paid for with cryptocurrencies) sent the price of Bitcoin plummeting by 29% in 24 hours.
The software used to verify Bitcoin transactions is created by developers and is run by miners (the global network people who verify Bitcoin transactions).
To change the software used to mine and authenticate transactions developers need more than 50% of the global network of miners to agree with that change. When they get that support they can create a “fork”.
On August 1 2017 Bitcoin underwent a “hard fork”. A new cryptocurrency – Bitcoin cash – was created and given to everyone who owned Bitcoin. Bitcoin cash software can process 30 transactions per second, four times more than Bitcoin.
Not many investors in Bitcoin are coders, however, or knew what the fork would entail. There was a period of uncertainty before the fork, and a period of rapid price rises afterwards.
Since then there has been another fork – to create Bitcoin gold.
The attempt at a third fork was the one that failed to get support last week. This seems to be the cause of the correction in the price of Bitcoin late last week (at the time of writing the price is down almost 20% from a peak of A$9,925 on November 8). However, the price of Bitcoin cash has simultaneously risen from A$818 to A$1,850.
