By Sterling Xie
Cryptocurrency is hard to substantiate—we’re told they’re valuable or will be valuable but we can’t see or touch them. With the introduction of simply outlandish currency names like DogeCoin or Squid Game Coin, the cryptocurrency market seems less and less credible. Bitcoin, the most popular form of cryptocurrency, is known to fluctuate by 5-10% in value every day. Yet, there are important factors that affect cryptocurrency which lends to its volatility.
Basic Economics
Like most other assets, Bitcoin and the cryptocurrency world are valued with a system of supply and demand. As cryptocurrency demand increases faster than the supply increases, the price will go up, making the currency more valuable. However, unlike other currencies, cryptocurrency isn’t printed in a mint or treasury. Instead, it is created in a process known as “block mining.” Bitcoin miners mine new blocks on the blockchain, allowing more room on the blockchain for transactions and purchases of the Bitcoin. However, there has been a fixed maximum supply of Bitcoin set at 21 million. When demand outpaced supply in early 2021, due to this fixed maximum supply, Bitcoin prices surged.
What does mining mean?
Mining means that you exploit your computer’s computational power to verify that the next block in a blockchain is valid, verifying transactions ledgers to the cryptocurrency’s blockchain. A large network of miners, like what Bitcoin has, allows the blockchain to be expanded by exploiting more computers’ computing power. By verifying the transactions, miners receive cryptocurrency and cryptocurrency tokens. This affects the price and fluctuation of Bitcoin more rationally as if mining costs (from energy costs) increase, the Bitcoin prices will also increase. Fewer miners will mine if they cannot make a profit from it or make less of a profit from it.
In reality, the proof-of-work system that Bitcoin runs on means that miners compete with each other to compute complex mathematical equations to create new blocks.
Competing Cryptocurrencies
Much like any other business industry, cryptocurrency is intrinsically connected to the competition in the blockchain market. As competition for a share of the blockchain increases, there are more competing cryptocurrencies, which in general affects both mining and supply and demand principles. Bitcoin currently has the largest share of the market by far and therefore has a stable share of the blockchain along with dedicated Bitcoin miners, making it one of the most stable cryptocurrencies in the world. Ultimately, increased competition between cryptocurrencies would create fluctuations in the market as different cryptocurrencies try to prove that they are better than the others.
Investing Tips
Ultimately, Bitcoin will likely stabilize under the assumption that the craze for cryptocurrencies remains as high as it has been in past years. As more and more people invest in Bitcoin, there will likely be more stabilization and growth in its prices.