The price of Bitcoin (BTC) has generally been declining since November, although the cryptocurrency's sharp price decline this week was likely triggered by rumors on Friday, Jan. 21, related to the U.S. regulation of digital assets.

Unidentified sources within the Biden administration said last week that the government is developing a strategy to address the economic, regulatory, and national security challenges posed by Bitcoin and other cryptocurrencies. The administration is reportedly also examining the opportunities created by the rise of digital assets, with the Biden administration's strategy potentially being made public as soon as February.

This likely report from the administration, while welcomed by those who believe that Bitcoin can benefit from greater regulatory certainty, has triggered some traders to sell their Bitcoin holdings. Bitcoin's price drop from more than $68, to current levels just above $37, is equivalent to the cryptocurrency losing nearly half its value.

The price of Bitcoin is also being affected by policy changes by the U.S. Federal Reserve. Federal Reserve Chair Jerome Powell said in December last year that the Federal Open Market Committee (FOMC) would double the monthly rate at which it reduces asset purchases. The Federal Reserve is now purchasing $20 billion less of U.S. Treasury securities each month and reducing by $10 billion each month its purchases of U.S. agency securities.

In his post-meeting press conference on Jan. 26, , Powell indicated that the FOMC will adhere to the bond purchase schedule that it announced in December While the fed funds rate is being kept near zero for now, developments related to inflation may change that. Keeping elevated inflation levels from becoming "entrenched" remains a key focus for the Fed.

Measures enacted by the Fed that are designed to control inflation have had a negative impact on the price of Bitcoin. The values of risky assets—like Bitcoin—tend to decline in the wake of the Federal Reserve making policy changes to become more fiscally conservative.

More broadly, as Bitcoin matures and becomes more widely adopted, the price of Bitcoin is increasingly correlated with the prices of traditional assets like stocks. This growing correlation means that any event that triggers price declines in the traditional markets is likely to trigger similar or greater price declines for Bitcoin.

The Dow Jones Industrial Average on Tuesday lost more than points before rebounding to post a loss at closing of less than points. Similarly, the S&P lost nearly 3% of its value before rebounding to post a loss of less than 50 points. The Nasdaq Composite Index, which tracks all of the stocks listed on the Nasdaq stock exchange, lost more than 3% of its value at the session low on Tuesday. Several non-U.S. indexes are also experiencing volatility and price declines.

Publicly traded companies with significant exposure to Bitcoin have been experiencing notable price declines. The stock prices on Monday of both Coinbase Global, Inc. (COIN) and MicroStrategy Incorporated (MSTR) declined by more than 15% at their session lows, although prices of both stocks stabilized somewhat on Tuesday. While Coinbase, as a cryptocurrency exchange, has direct operational exposure to Bitcoin, MicroStrategy is an enterprise software company that holds billions of dollars of Bitcoin on its balance sheet.

Should Bitcoin Investors Panic?

Bitcoin investors may not need to panic about the recent market sell-off, but it's important to understand the factors affecting Bitcoin's price movements. Rumors and government policy changes aside, investors should expect that the prices of Bitcoin and other digital assets will increasingly move in correlation with the prices of traditional assets.

Little-known cryptocurrencies may continue to trade at prices that are uncorrelated with the prices of traditional assets, but the same may not be true for the most-established cryptocurrencies like Bitcoin and Ethereum. Bitcoin investors concerned about the cryptocurrency's price can benefit from monitoring developments related to both Bitcoin and the broader financial market.

Ric Edelman, founder of the Digital Assets Council of Financial Professionals, told Investopedia that "this is the fifth time Bitcoin's price has fallen by 50% or more since its inception in " While the most recent sell-off may not be a reason to part with your Bitcoin, the cryptocurrency's "massive price volatility reflect[s] the fact that this is still a new, emerging asset class, and experiencing growing pains." Edelman also notes that many investors "still view the long-term outlook [for Bitcoin] favorably," despite significant price volatility being "an inherent feature of Bitcoin."

Meanwhile, more regulation of Bitcoin and other digital assets may be forthcoming. The Federal Reserve on Thursday released a research report that explores the creation of a digital version of the U.S. dollar.

As of this writing, Bitcoin is currently trading at around $37,, down approximately 45% from its high posted in November

It has been a year of highs for bitcoin and cryptocurrencies. After surpassing the $5, mark, bitcoin is poised to surpass $6, next. As of this writing, bitcoin is trading at $5, Cumulatively, it is up by % since the start of this year.

A bunch of cryptocurrencies, including ethereum and litecoin, have imitated bitcoin’s trajectory and racked up gains ranging from 4,% to 1,% respectively. Besides the inherent dynamics of cryptocurrencies (there is a limited number of them in the market), other factors are at work in raising their prices. 

Here are two factors influencing bitcoin’s price right now.

Interest From Institutional Investors

A recent Bank of America report attributes the increased value of cryptocurrencies to interest by institutional investors. As financial services companies begin offering cryptocurrencies in custom products, Bank of America predicts that it could affect the “liquidity and market capitalization for such currencies.”

European institutions have taken the lead in designing new products using cryptocurrencies. For example, investors can track ethereum’s price using exchange-traded notes in Nasdaq’s Sweden exchange. Switzerland’s financial regulation authority has approved a product from Falcon Bank that enables its clients to trade in bitcoin. U.S. banks are following suit.

Goldman Sachs is said to be considering bitcoin trading while JP Morgan launched a payment network based on ethereum’s blockchain yesterday. These moves could translate into another price increase across the board.

Interest From Asia

South Korea and China may have clamped down on bitcoin, but that hasn’t tamped investor interest in the cryptocurrencies. (See also: After China, South Korea Bans ICOs). According to reports, investors in both countries are paying a premium to invest in bitcoin and cryptocurrencies. In fact, some bitcoin trades through China’s OKCoin exchange have already surpassed the $6, value. 

South Korea’s regulation has resulted in limited numbers of cryptocurrencies and high demand. The result is that the Asian country has become the largest market for ethereum. Demand from Japan, which recognized bitcoin as legal tender earlier this year, could also drive up prices for cryptocurrencies. (See also: Bitcoin Gets Boost From Japan.) 

In recent weeks Bitcoin's price has seemed to continue marching higher. But what is driving this growth? It turns out there are a wide variety of factors that continue to make Bitcoin rise in value.

Previous Resistance

Bitcoin has seen extremely volatile peaks and troughs in its time. Its last peak was near $14, in June of At this point, Bitcoin experienced a hard resistance and it failed to push through this stage.

If Bitcoin were to break through that resistance in June it would have likely triggered a bull market. Unfortunately, for Bitcoin bulls, it failed to do so and cascaded down to a low point of nearly $3,

In October, Bitcoin retested this resistance point only to fall back down. On November 4th, Bitcoin pushed straight through $14, and continued higher. This is significant because Bitcoin's next resistance point is its previous all-time high of $20,

With Bitcoin no longer having a theoretical resistance point until its previous all-time high of $20,, many investors have become bullish that the cryptocurrency will be able to retest that price point or even push past it. This speculation has lead to an increase in Bitcoin's value.

Inflation and the Rush Toward Safe-Haven Assets

Another reason for Bitcoin's rise is the growing inflation of the U.S. dollar. While inflation is on average 2% each year, recent stimulus spending is poised to greatly increase the level of inflation and decrease the dollar's purchasing power.

With the recent stimulus packages, the United States has added around $ trillion to the economy. This has many worrying about the inevitable decrease in the dollar's purchasing power and the rise in inflation.

To hedge against this rising inflation, many have retreated from the dollar and have taken shelter in assets that historically have held value or have even appreciated in value. Typically, assets that people convert their dollars into to avoid inflation or volatile markets are ones that are scarce or are less volatile in general. These 'safe-haven' assets include things like precious metals, stocks in sectors that are generally less volatile, and more recently, Bitcoin.

Adoption as a Means of Payment

Another reason for Bitcoin's price appreciation is its growing adoption as a payment method. Recently, PayPal (PYPL) announced that it would soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as a form of payment.

This news pushed Bitcoin's price higher immediately. PayPal has nearly million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also has well over 20 million active merchants who can now accept the currency.

Aside from PayPal, this has further implications. PayPal also owns the widely popular payment app, Venmo. Venmo has more than 40 million active accounts, making the accessibility to Bitcoin and other cryptocurrencies even more significant.

While PayPal and Venmo are newer to crypto, there are a host of other applications that allow its users to buy, sell, and hold. Popular competitors to PayPal and Venmo, Square (SQ) and CashApp, also accept cryptocurrencies making the audience to Bitcoin even wider.

Institutional Investment

As discussed above, there is a growing narrative of Bitcoin as a safe-haven asset. In the current societal and economic climate there is a growing incentive to hold less cash and be hedged against intense market swings.

Recently, a trend started where publicly traded companies were beginning to convert cash in their treasuries over to Bitcoin as a more sound store-of-value. Most notably, MicroStrategy, a business analytics company, converted $ million worth of cash in its treasury to Bitcoin. Shortly after the payments company Square made a $50 million purchase.

Since then, a number of companies have followed suit. The confidence that these companies and their investors have in Bitcoin has given increased merit to the concept of Bitcoin as a store-of-value and safe-haven asset.

Halving and the Stock-To-Flow Model

Perhaps the most important reasons for the rise in Bitcoin's price are two attributes that are inherent in its design.

The first: there is only 21 million Bitcoin that will ever exist. There will be no more and no less and this number will always stay static. This makes bitcoin more scarce than anything that has come before it. Other scarce assets are not % finite and in some cases, they can be synthetically manufactured.

The second is a process coded into Bitcoin called the halving. Essentially, Bitcoin has its own built-in escrow mechanism where Bitcoin is released and given to miners as a reward for processing transactions. This reward is cut in half every four years.

By doing so, Bitcoin's rate of inflation is reduced by half each halving and its stock-to-flow ratio is doubled each halving. This process continues every four years until all Bitcoin in this escrow mechanism is released and in circulation. From that point on Bitcoin in circulation will be capped at 21 million. As of the time of writing, there are 18,, in circulation.

So far, Bitcoin's price has followed its stock-to-flow ratio very closely and if it were to continue on this trajectory Bitcoin's value could be somewhere around $, in late

Rising Cost of Production

Another reason for Bitcoin's rise is that as the size of mining network grows, so does the mining difficulty -- which, in turn, increases the marginal cost to produce a bitcoin. Bitcoin mining requires a great deal of energy, and this has a real cost that must be paid by miners in their local currency. Because Bitcoin's protocol mandates one block be found, on average, every ten minutes, the more hashing power directed at mining does not increase the rate of new supply - it only increases the difficulty of mining. Research has shown the the price of a bitcoin has closely tracked its marginal cost of production.

Cryptocurrency Performance for

returns -

• Bitcoin (BTC): +%
• Ethereum (ETH): +%
• Ripple (XRP): +%
• Bitcoin Cash (BCH): +%
• S&P : +%

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") can be highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

How exactly to categorize Bitcoin is a matter of controversy. Is it a type of currency, a store of value, a payment network, or an asset class?

Fortunately, it's easier to define what Bitcoin actually is. It's software and a purely digital phenomenon—a set of protocols and processes.

It is also the most successful of hundreds of attempts to create virtual money through the use of cryptography. Bitcoin has inspired hundreds of imitators, but it remains the largest cryptocurrency by market capitalization, a distinction it has held throughout its decade-plus history.

Like standard currency, Bitcoin is produced and has processes and safeguards in place to prevent fraud and ensure appreciation in its value. The main building blocks of Bitcoin are blockchain, mining, hashes, halving, keys, and wallets. They are discussed in detail below.

(A general note: According to the Bitcoin Foundation, the word "Bitcoin" is capitalized when it refers to the cryptocurrency as an entity, and it is given as "bitcoin" when it refers to a quantity of the currency or the units themselves. Bitcoin is also abbreviated as BTC. Throughout this article, we will alternate between these usages.)

The Blockchain

Bitcoin is a network that runs on a protocol known as the blockchain. While it does not mention the word blockchain, a paper by a person or people calling themselves Satoshi Nakamoto first described the use of a chain of blocks to verify transactions and engender trust in a network.

The blockchain​ has since evolved into a separate concept, and thousands of blockchains have been created using similar cryptographic techniques. This history can make the nomenclature confusing. Blockchain sometimes refers to the original Bitcoin blockchain. At other times, it refers to blockchain technology in general, or to any other specific blockchain, such as the one that powers Ethereum​.

Any given blockchain consists of a single chain of discrete blocks of information, arranged chronologically. In principle, this information could include emails, contracts, land titles, marriage certificates, or bond trades. In theory, any type of contract between two parties can be established on a blockchain as long as both parties agree on the contract. This takes away any need for a third party to be involved in any contract and opens up a world of possibilities including peer-to-peer financial products, such as loans or decentralized savings and checking accounts, wherein banks or any intermediary are irrelevant.

Blockchain's versatility has caught the eye of governments and private corporations; indeed, some analysts believe that blockchain technology will ultimately be the most impactful aspect of the cryptocurrency craze.

In Bitcoin's case, the information on the blockchain is mostly transactions. Bitcoin is really just a list. Person A sent X bitcoin to person B, who sent Y bitcoin to person C, etc. By tallying these transactions up, everyone knows where individual users stand. It's important to note that these transactions do not necessarily need to take place between humans.

Bitcoin's blockchain network creates vast possibilities for the Internet of things. In the future, we could see systems in which self-driving taxis or Uber vehicles have their own blockchain wallets. The passenger would send cryptocurrency directly to the car, which would not move until the funds were received. The vehicle would be able to assess when it needs fuel and use its wallet to facilitate a refill.

Another name for a blockchain is a "distributed ledger," which emphasizes the key difference between this technology and a well-kept Word document. Bitcoin's blockchain is distributed, meaning that it is public. Anyone can download it in its entirety or go to any number of sites that parse it. This means that the record is publicly available, but it also means that there are complicated measures in place for updating the blockchain ledger. There is no central authority to keep tabs on all Bitcoin transactions, so the participants themselves do so by creating and verifying "blocks" of transaction data. See the section on mining below for more information.

You can see the status of blocks, and their associated transactions, on sites. Such sites list the address identifier for the transacting parties, dates, the date on which the transaction took place, and the time of the transaction.

The long strings of numbers and letters are addresses, and if you were in law enforcement or just very well informed, you could probably figure out who controlled them. It is a misconception that Bitcoin's network is totally anonymous, although taking certain precautions can make it very hard to link individuals to transactions.

Post-Trust

Despite being absolutely public, or rather because of that fact, Bitcoin is extremely resistant to tampering. A bitcoin has no physical presence, so you can't protect it by locking it in a safe or burying it in the woods. In theory, all a thief would need to do to take it from you would be to add a line to the ledger that translates to "you paid me everything you have."

A related worry is double-spending. If a bad actor could spend some bitcoin, then spend it again, confidence in the currency's value would quickly evaporate. To achieve a double-spend, the bad actor would need to make up 51% of the mining power of Bitcoin. The larger the Bitcoin network grows, the less realistic this becomes as the computing power required would be astronomical and extremely expensive.

To further prevent either from happening, you need trust. In this case, the accustomed solution with traditional currency would be to transact through a central, neutral arbiter such as a bank. Bitcoin has made that unnecessary, however. (It is probably no coincidence that Nakamoto's original description was published in October , when trust in banks was at a multigenerational low.) Rather than having a reliable authority to keep the ledger and preside over the network, the Bitcoin network is decentralized. Everyone keeps an eye on everyone else.

No one needs to know or trust anyone in particular in order for the system to operate correctly. Assuming everything is working as intended, the cryptographic protocols ensure that each block of transactions is bolted onto the last in a long, transparent, and immutable chain. 

Mining

The process that maintains this trustless public ledger is known as mining. Undergirding the network of Bitcoin users who trade the cryptocurrency among themselves is a network of miners who record these transactions on the blockchain. 

Recording a string of transactions is trivial for a modern computer, but mining is difficult because Bitcoin's software makes the process artificially time-consuming. Without the added difficulty, people could spoof transactions to enrich themselves or bankrupt other people. They could log a fraudulent transaction in the blockchain and pile so many trivial transactions on top of it that untangling the fraud would become impossible.

By the same token, it would be easy to insert fraudulent transactions into past blocks. The network would become a sprawling, spammy mess of competing ledgers, and Bitcoin would be worthless.

Combining "proof of work" with other cryptographic techniques was Nakamoto's breakthrough. Bitcoin's software adjusts the difficulty miners face in order to limit the network to a new 1-megabyte block of transactions every 10 minutes. That way, the volume of transactions is digestible. The network has time to vet the new block and the ledger that precedes it, and everyone can reach a consensus about the status quo. Miners do not work to verify transactions by adding blocks to the distributed ledger purely out of a desire to see the Bitcoin network run smoothly; they are compensated for their work as well. We'll take a closer look at mining compensation below.

Halving

As previously mentioned, miners are rewarded with Bitcoin for verifying blocks of transactions. This reward is cut in half every , blocks mined, or, about every four years. This event is called the halving or "the halvening." The system is built-in as a deflationary one for the rate at which new Bitcoin is released into circulation.

This process is designed so that rewards for Bitcoin mining will continue until about When all Bitcoin is mined from the code and all halvings are finished, the miners will remain incentivized by fees that they will charge network users. The hope is that healthy competition will keep fees low.

This system drives up Bitcoin's stock-to-flow ratio and lowers its inflation until it is eventually zero. After the third halving that took place on May 11, , the reward for each block mined became bitcoins.

Hashes

Here is a slightly more technical description of how mining works. The network of miners, who are scattered across the globe and not bound to each other by personal or professional ties, receives the latest batch of transaction data. They run the data through a cryptographic algorithm that generates a "hash"—a string of numbers and letters that verifies the information's validity but does not reveal the information itself. (In reality, this ideal vision of decentralized mining is no longer accurate, with industrial-scale mining farms and powerful mining pools forming an oligopoly. More on that below.)

Given the hash c2c4dfbd55d64f1a7c22ffeb66e15eca30, you cannot know what transactions the relevant block (#) contains. You can, however, take a bunch of data purporting to be block # and make sure that it hasn't been subject to any tampering. If one number were out of place, no matter how insignificant, the data would generate a totally different hash. For example, if you were to run the Declaration of Independence through a hash calculator, you might get fcaa4bc84e2bafec76ace5da68cf5c36bd3f Delete the period after the words "submitted to a candid world," though, and you get e4fdca4c5efcdcd4cffcab93f60f82f23f97c4. This is a completely different hash, although you've only changed one character in the original text.

A hash allows the Bitcoin network to instantly check the validity of a block. It would be incredibly time-consuming to comb through the entire ledger to make sure that the person mining the most recent batch of transactions hasn't tried anything funny. Instead, the previous block's hash appears within the new block. If the most minute detail had been altered in the previous block, that hash would change. Even if the alteration was 20, blocks back in the chain, that block's hash would set off a cascade of new hashes and tip off the network.  

Generating a hash is not really work, though. The process is so quick and easy that bad actors could still spam the network and perhaps, given enough computing power, pass off fraudulent transactions a few blocks back in the chain. So the Bitcoin protocol requires proof of work.

It does so by throwing miners a curveball: Their hash must be below a certain target. That's why block #'s hash starts with a long string of zeroes. It's tiny. Because every string of data will generate one and only one hash, the quest for a sufficiently small one involves adding nonces ("numbers used once") to the end of the data. So, a miner will run [thedata]. If the hash is too big, she will try again. [thedata]1. Still too big. [thedata]2. Finally, [thedata] yields her a hash beginning with the requisite number of zeroes.

The mined block will be broadcast to the network to receive confirmations, which take another hour or so, although occasionally much longer, to process. (Again, this description is simplified. Blocks are not hashed in their entirety but broken up into more efficient structures called Merkle trees.)

(Minutes, 7-day average)

Depending on the kind of traffic the network is receiving, Bitcoin's protocol will require a longer or shorter string of zeroes, adjusting the difficulty to hit a rate of one new block every 10 minutes. As of November , the current difficulty is around trillion, up from 1 in As this suggests, it has become significantly more difficult to mine Bitcoin since the cryptocurrency launched a decade ago.

Mining is intensive, requiring big, expensive rigs and a lot of electricity to power them. And it's competitive. There's no telling what nonce will work, so the goal is to plow through them as quickly as possible.

Early on, miners recognized that they could improve their chances of success by combining into mining pools, sharing computing power, and divvying the rewards up among themselves. Even when multiple miners split these rewards, there is still ample incentive to pursue them. Every time a new block is mined, the successful miner receives a bunch of newly created bitcoins. At first, it was 50, but then it halved to 25, and then it became The fourth halving in bitcoin's history occurred on May 11, , and now the reward is set at

The reward will continue to halve every , blocks, or about every four years, until it hits zero. At that point, all 21 million bitcoins will have been mined, and miners will depend solely on fees to maintain the network. When Bitcoin was launched, it was planned that the total supply of the cryptocurrency would be 21 million tokens.

The fact that miners have organized themselves into pools worries some. If a pool exceeds 50% of the network's mining power, its members could potentially spend coins, reverse the transactions, and spend them again. They could also block others' transactions. Simply put, this pool of miners would have the power to overwhelm the distributed nature of the system, verifying fraudulent transactions by virtue of the majority power it would hold.

That could spell the end of Bitcoin, but even a so-called 51% attack would probably not enable the bad actors to reverse old transactions because the proof of work requirement makes that process so labor-intensive. To go back and alter the blockchain, a pool would need to control such a large majority of the network that it would probably be pointless. When you control the whole currency, with whom can you trade?

A 51% attack is a financially suicidal proposition from the miners' perspective. When www.oldyorkcellars.com, a mining pool, reached 51% of the network's computing power in , it voluntarily promised to not exceed % of the Bitcoin hash rate in order to maintain confidence in the cryptocurrency's value. Other actors, such as governments, might find the idea of such an attack interesting, though. But again, the sheer size of Bitcoin's network would make this overwhelmingly expensive, even for a world power.

Another source of concern related to miners is the practical tendency to concentrate in parts of the world where electricity is cheap, such as China, or, following a Chinese crackdown in early , Quebec. Bitcoin mining consumes massive amounts of electricity, and this has led some governments to curtail access to power or designate special rates for Bitcoin miners. This, coupled with the Chinese government's repeated attempts to crack down on mining systems located in that country, has led to a dispersion of miners across the globe. As of October , the United States had surpassed China to become the world's biggest global hub for Bitcoin mining.

Bitcoin Transactions

For most individuals participating in the Bitcoin network, the ins and outs of the blockchain, hash rates, and mining are not particularly relevant. Outside of the mining community, Bitcoin owners usually purchase their cryptocurrency supply through a Bitcoin exchange. These are online platforms that facilitate transactions of Bitcoin and, often, other digital currencies.

Bitcoin exchanges such as Coinbase bring together market participants from around the world to buy and sell cryptocurrencies. These exchanges have been both increasingly popular (as Bitcoin's popularity itself has grown in recent years) and fraught with regulatory, legal, and security challenges. With governments around the world viewing cryptocurrencies in various ways—as currency, as an asset class, or any number of other classifications—the regulations governing the buying and selling of bitcoins are complex and constantly shifting.

Perhaps even more important for Bitcoin exchange participants than the threat of changing regulatory oversight, however, is that of theft and other criminal activity. Although the Bitcoin network itself has largely been secure throughout its history, individual exchanges are not necessarily the same. Many thefts have targeted high-profile cryptocurrency exchanges, often resulting in the loss of millions of dollars worth of tokens.

The most famous exchange theft is likely from Mt. Gox, which dominated the Bitcoin transaction space up through Early in that year, the platform announced the probable theft of roughly , BTC worth close to $ million at the time. Mt. Gox filed for bankruptcy and shuttered its doors; to this day, the majority of that stolen bounty (which would now be worth a total of about $8 billion) has not been recovered.

Keys and Wallets

For these reasons, it's understandable that Bitcoin traders and owners will want to take any possible security measures to protect their holdings. To do so, they utilize keys and wallets.

Bitcoin ownership essentially boils down to two numbers, a public key and a private key. A rough analogy is a username (public key) and a password (private key). A hash of the public key called an address is the one displayed on the blockchain. Using the hash provides an extra layer of security.

To receive bitcoins, it's enough for the sender to know your address. The public key is derived from the private key, which you need to send bitcoins to another address. The system makes it easy to receive money but requires verification of identity to send it. 

To access bitcoins, you use a wallet, which is a set of keys. These can take different forms, from third-party web applications offering insurance and debit cards, to QR codes printed on pieces of paper. The most important distinction is between "hot" wallets, which are connected to the internet and therefore vulnerable to hacking, and "cold" wallets, which are not connected to the internet.

In the Mt. Gox case above, it is believed that most of the BTC stolen were taken from a hot wallet. Still, many users entrust their private keys to cryptocurrency exchanges, which is essentially a bet that those exchanges will have stronger defenses against the possibility of theft than one's own computer would.

The Bottom Line

Bitcoin, the digital currency and payment network, is actually software and a purely digital phenomenon—a set of protocols and processes. The main component of Bitcoin is blockchain, a series of digital blocks that are linked together as a list and maintain records of all transactions occurring in its network. The use of a blockchain enables Bitcoin to function as a decentralized system that does not require a neutral central entity to confirm and process transactions.

The Bitcoin network is undergirded by mining operations that confirm and process transactions. Miners receive bitcoin as a reward for their effort, and the number of bitcoin awarded to miners is halved every four years in an event known as halving or halvening.

Cryptocurrency exchanges are also important to making Bitcoin work because they enable ordinary users to purchase or trade bitcoins, thereby increasing the number of transactions on its network. Finally, cryptographic keys and wallets are necessary to access and store bitcoin.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

What Determines Bitcoin’s Price?

Bitcoin (BTCUSD) is a cryptocurrency developed in by Satoshi Nakamoto, the name given to the unknown creator (or creators) of this virtual currency. Transactions are recorded in a blockchain, which shows the transaction history for each unit and proves ownership.

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different from purchasing a stock or bond, because Bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form Ks to review.

Understanding What Determines Bitcoin’s Price

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to Bitcoin. Conversely, Bitcoin prices are influenced by the following factors:

• The supply of Bitcoin and the market’s demand for it
• The cost of producing a bitcoin through the mining process
• The rewards issued to Bitcoin miners for verifying transactions to the blockchain
• The number of competing cryptocurrencies
• Regulations governing its sale and use
• The state of its internal governance
• News developments

Supply 

The supply of an asset plays an important role in determining its price. A scarce asset is more likely to have high prices, whereas one that is available in plenty will have low prices. Bitcoin’s supply has been dwindling since inception. The cryptocurrency’s protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time. Thus, the supply of Bitcoin slowed from % in to % in and 4% in Bitcoin halving events, which occur every four years, generally correspond to a significant bump in its prices because it means that the cryptocurrency’s supply has been reduced. 

Demand 

While Bitcoin has yet to find favor as a medium of exchange, it has attracted the attention of retail investors. The locus of Bitcoin’s demand shifts based on economic and geopolitical considerations. For example, China’s citizens may have reportedly used the cryptocurrency to circumvent capital controls in Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. It is also popular with criminals who use it to transfer large sums of money for illicit activities. Finally, investor demand for the cryptocurrency has also risen with increased media coverage. 

All of this means that shrinkage in supply has coupled with a surge in demand, acting as fuel for bitcoin prices. Alternating periods of booms and busts have become a feature of the cryptocurrency ecosystem. For example, a run-up in bitcoin’s prices in was succeeded by a prolonged winter.

Cost of Production 

Just as for other commodities, the cost of production plays an important role in determining the price of bitcoin. According to research, bitcoin’s price in crypto markets is closely related to its marginal cost of production.

For bitcoin, the cost of production is roughly a sum of the direct fixed costs for infrastructure and electricity required to mine the cryptocurrency and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of miners competing to solve a complex math problem—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees that have accumulated since the last block was found.  

Arriving at a solution to the problem requires brute force in the form of considerable processing power. In monetary terms, this means the miner will have to spend money on racking mining machines equipped with expensive processors. The bitcoin-mining process also incurs costly electricity bills.

According to estimates by some sites, electricity consumption for the bitcoin-mining process is equal to or more than that of entire countries. An indirect cost of bitcoin mining is the difficulty level of its algorithm. The varying difficulty levels of bitcoin’s algorithms can hasten or slow down the rate of bitcoin production and affect its overall supply, thereby affecting its price.

Competition 

Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for crypto investment dollars. As of , Bitcoin dominates trading in cryptocurrency markets. But its dominance has waned over time. In , Bitcoin accounted for more than 80% of the overall market capitalization of crypto markets. By , that share was down to less than 50%.

The main reason for this was an increase in awareness of and capabilities for alternative coins. For example, Ethereum’s Ether (ETHUSD) has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) tokens. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether, the cryptocurrency used as “gas” for transactions on its network. On Oct. 13, , Ethereum accounted for almost 18% of the overall market cap of cryptocurrency markets.

Ripple’s XRP (XRPUSD) and Cardano’s ADA (ADAUSD) have also surged in popularity, while growth in stablecoins had attracted investor attention toward Binance’s BNB token (BNBUSD).

Even though it has siphoned away investment dollars from the Bitcoin ecosystem, competition has also attracted investors to the asset class. As a result, demand and awareness about cryptocurrencies have increased. As a standard-bearer of sorts for the cryptocurrency ecosystem, Bitcoin has benefited from the attention, and its prices have surged.

Regulatory Developments 

Bitcoin was released in the aftermath of a financial crisis precipitated by the loosening of regulations in the derivatives market. The cryptocurrency itself remains mostly unregulated and has garnered a reputation for its border- and regulation-free ecosystem.

Bitcoin’s lack of regulatory status has its benefits and drawbacks. On one hand, the absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies. On the other hand, it also means that Bitcoin use and trade can invite criminal consequences in most financial jurisdictions. The vast majority of institutional investors are still wary of putting their money into the asset class, resulting in less liquidity and more volatility for its ecosystem.

The more governments around the world incorporate bitcoin into their economies and markets, the greater its chances of becoming a legitimate asset class for investment. Cryptocurrency investors and traders follow regulatory developments related to Bitcoin closely because it is an indicator of liquidity in crypto markets. These developments exert pressure on its price because they affect its supply and demand.

For example, China’s moves to ban bitcoin trading and limit operations of bitcoin-mining infrastructure affect the cryptocurrency’s supply and demand.

In the United States, cryptocurrency rulings delivered by the Securities and Exchange Commission (SEC) often have a direct impact on the price of Bitcoin. For example, in October , the price of Bitcoin surged above $66, the day after the SEC allowed trading of the first U.S. bitcoin-related ETF: the ProShares Bitcoin Strategy ETF (BITO).

News Developments 

Bitcoin’s nascent ecosystem means that news developments have a direct impact on its price. These developments can be of various types.

As mentioned earlier, regulatory news can move the cryptocurrency’s prices substantially. Hard and soft forks, which alter the number of bitcoins in existence, can also change investor perception of the cryptocurrency. For example, the forking of Bitcoin’s blockchain into Bitcoin Cash in August resulted in price volatility and spurred the valuation of both coins.

Bitcoin’s governance policies, which are set by a group of core developers, also affect its price. Protocol modifications that alter the number of bitcoin in existence or philosophical disagreements among developers about the cryptocurrency’s future direction are closely watched investor indicators.

The Bottom Line 

Even though it has been around for more than a decade, Bitcoin is still a nascent asset class. That means its price is determined by a complex combination of factors that include production costs, competition, and regulatory developments. The cryptocurrency’s technological roots mean that other factors—such as the difficulty levels of its algorithms and forks on its blockchains—can also play important roles in determining its price.

Bitcoin (BTCUSD) is often referred to as digital currency and as an alternative to central bank-controlled fiat money. However, the latter is valuable because it is issued by a monetary authority and is widely used in an economy. Bitcoin's network is decentralized, and the cryptocurrency is not used much in retail transactions.

One can argue that Bitcoin's value is similar to that of precious metals. Both are limited in quantity and have select use cases. Precious metals like gold are used in industrial applications, while Bitcoin's underlying technology, the blockchain, has some applications across the financial services industries. Bitcoin's digital provenance means that it might even serve as a medium for retail transactions one day.

Why Traditional Currencies Have Value

There are six key attributes to a useful currency: scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). These qualities allow a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.

Currency is useful if it works as a store of value or, to put it differently, if it can reliably maintain its relative value over time. Throughout history, many societies used commodities or precious metals as methods of payment because they were considered to have a relatively stable value.

Rather than carry around cumbersome quantities of cocoa beans, gold, or other early forms of money, societies eventually turned to minted currency as an alternative. The first such currencies used metals like gold, silver, and bronze, which had long shelf lives and little risk of depreciation.

Assigning value to currencies is a matter of debate. Initially, their value came from intrinsic physical properties. For example, gold's value comes from the costs of extraction and certain qualitative factors, such as luster and purity content.

In the modern age, government-issued currencies often take the form of paper money, which does not have the same intrinsic scarcity as precious metals. For a long time, the value of paper money was determined by the amount of gold backing it. Even today, some currencies are "representative," meaning that each coin or note can be directly exchanged for a specified amount of a commodity.

The idea of a currency's value began changing in the 17th century. Prominent Scottish economist John Law wrote that money—currency issued by a government or monarch—"is not the value for which goods are exchanged, but the value by which they are exchanged." In other words, the value of a currency is a measure of its demand and its ability to stimulate trade and business within and outside an economy.

This thinking hews closely to the modern credit theory for monetary systems. In this theory, commercial banks create money (and value for currencies) by lending to borrowers, who use the money to purchase goods and cause currency to circulate in an economy.

After countries abandoned the gold standard in an effort to curb concerns about gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that others will accept that currency.

Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least susceptible to loss of value over time. The value of fiat currencies is a function of their demand and supply. The U.S. dollar is considered valuable because the world's biggest economy uses it and it dominates the flow of payments in international trade.

The Value of Digital Currencies

Any discussion about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to its inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.

Here's an example. During the financial crisis, Ben Bernanke, who was then the governor of the Federal Reserve, appeared on CBS' 60 Minutes and explained how the agency "rescued" insurance giant American International Group (AIG) and other financial institutions from bankruptcy by lending money to them. Puzzled, the interviewer asked whether the Fed had manufactured billions of dollars. That wasn't quite the case.

"So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed," explained Bernanke. In other words, the Fed "manufactured" U.S. dollars through entries in its ledger. This ability to "mark up" an account exemplifies the nature of currencies in their digital form. It has implications for the velocity and use of currencies because it simplifies and streamlines transactions involving them.

Why Does Bitcoin Have Value?

Bitcoin does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network. There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, if a transaction goes awry.

The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce, and cannot be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend. This refers to a situation in which a user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.

Utility

What makes double-spending unlikely, though, is the size of the Bitcoin network. A so-called 51% attack, in which a group of miners theoretically control more than half of all network power, would be necessary. By controlling a majority of all network power, this group could dominate the remainder of the network to falsify records. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely.

But Bitcoin often fails the utility test because people rarely use it for retail transactions. The main source of value for Bitcoin is its scarcity. The argument for Bitcoin's value is similar to that of gold—a commodity that shares characteristics with the cryptocurrency. The cryptocurrency is limited to a quantity of 21 million.

Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis. Most fiat currencies can only be divided into two decimal places for everyday use.

If Bitcoin's price continues to rise over time, users with a tiny fraction of a bitcoin will still be able to make transactions with the cryptocurrency. The development of side channels, such as the Lightning Network, may further boost the value of Bitcoin's economy.

Scarcity

Bitcoin's value is a function of this scarcity. As the supply diminishes, demand for cryptocurrency has increased. Investors are clamoring for a slice of the ever-increasing profit pie that results from trading its limited supply.

Bitcoin also has limited utility like gold, the applications for which are mainly industrial. Bitcoin's underlying technology, called blockchain, is tested and used as a payment system. One of its most effective use cases is in remittances across borders to bump up speed and drive down costs. Some countries, like El Salvador, are betting that Bitcoin's technology will evolve sufficiently to become a medium for daily transactions.

Marginal Cost of Production

Another theory is that Bitcoin does have intrinsic value based on the marginal cost of producing one bitcoin. Mining for bitcoins involves a great deal of electricity, and this imposes a real cost on miners. According to economic theory, in a competitive market among producers all making the same product, the selling price of that product will tend towards its marginal cost of production. Empirical evidence has shown that the price of a bitcoin tends to follow the cost of production.

Monetarist Theories

Monetarists try to value bitcoin as they would money, using the supply of money, its velocity, and the value of goods produced in an economy. The simplest way to this approach would be to look at the current worldwide value of all mediums of exchange and of all stores of value comparable to Bitcoin and then calculate the value of Bitcoin's projected percentage. The predominant medium of exchange is government-backed money, and for our model, we will focus solely on that. Roughly speaking, the money supply (M1) in the U.S. was worth more than $20 trillion as of the end of

Assuming this total remains stable, if Bitcoin were to achieve 15% of this valuation, its market capitalization in today's money would be approximately $3 trillion. With all 21 million bitcoins in circulation, that would put the price of 1 bitcoin at roughly $,

The Challenges of Valuing Bitcoin

One of the biggest issues is Bitcoin's status as a store of value. Bitcoin's utility as a store of value depends on how well it works as a medium of exchange. If Bitcoin does not achieve success as a medium of exchange, it will not be useful as a store of value.

Throughout much of its history, speculative interest has been the primary driver of Bitcoin's value. Bitcoin has exhibited the characteristics of a bubble with drastic price run-ups and a craze of media attention. This is likely to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.

Difficulties surrounding cryptocurrency storage and exchange spaces also challenge Bitcoin's utility and transferability. In recent years, hacks, thefts, and fraud have plagued digital currency.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.

After its launch in , Bitcoin ushered in a new era of blockchain technology and digital currencies. Given all the talk about Bitcoin, you'd think it would be everywhere. Is that really true? How much is Bitcoin worth? Perhaps more importantly, how much of the world's money is in bitcoins? With the price of BTC at $54, as of Nov. 26, , it is certainly worth our time to figure it out.

How Much Is Bitcoin Worth?

We will calculate the total value of Bitcoin first because that is the easy part. According to CoinMarketCap, the value of all the bitcoins in the world was over $ trillion as of Nov. 26, For comparison, Forbes estimated the net worth of Amazon (AMZN) founder Jeff Bezos at $ billion. That makes the market cap of Bitcoin over five times larger than Bezos' fortune.

Bitcoin and the Money Supply

To get a sense of how much of the world's money is in bitcoins, we must determine the total amount of money. As it turns out, this is not the easiest question to answer. Such a calculation might take into account dozens of categories of wealth, including banknotes, precious metals, money market accounts, and debt. The Money Project attempted this computation in May of and estimated around $ trillion in global narrow money.

That leaves Bitcoin at about % of the estimated value of narrow money from The Money Project's report.

Bitcoin vs. Gold

How does Bitcoin compare to gold? After all, some people still consider gold to be the safest of safe haven assets. It is certainly the gold standard to which other currencies must be compared. We begin with the World Gold Council's figures. They estimated that about , tonnes of gold had been mined throughout history as of the end of An average of around 2, tonnes are mined per year, so we can safely estimate around , tonnes of gold in existence as of Nov. 26, There are 32, troy ounces of gold in one tonne, and the price of gold per ounce is about $1, as of Nov. 26, So, we can estimate the total value of all gold as:

, tonnes of gold x 32, troy ounces per tonne x $1, per ounce = $ trillion.

In total, the value of all Bitcoin was about 9% of the value of all gold.

Other Cryptocurrencies

Bitcoin is the largest and best-known cryptocurrency in the global economy. However, it is far from the only one. If we combine Bitcoin with Litecoin, Monero, Ethereum, and all other significant cryptocurrencies, the total value comes to roughly $ trillion. That is about 7% of the value of all narrow money given above.

Bitcoin’s Percentage of All Money FAQs 

What percentage of all money is Bitcoin?

As of Nov. 26, , the combined market value of all existing bitcoins (market capitalization) was equivalent to % of the combined value of the world's narrow money supply.

What is the total value of all bitcoins?

As of Nov. 26, , the combined market value of the world's bitcoins totaled over $ trillion.

For how much does Bitcoin sell?

Bitcoin prices are highly volatile and subject to market fluctuations. As of Nov. 26, , the global market price of a bitcoin was $54,

How much money is there in the world altogether?

Based on estimates from The Money Project, the combined value of all the world's narrow money (coins, currency, demand deposits, and other assets held by central banks) was worth $ trillion as of May 27,

How much money is in the U.S.?

According to the Federal Reserve Bank of St. Louis, the M1 Money Supply, or the total amount of money in the U.S., was $ trillion in

Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.

The price of Bitcoin (BTC) has generally been declining since November, although the cryptocurrency's sharp price decline this week was likely triggered by rumors on Friday, Jan. 21, related to the U.S. regulation of digital assets.

Unidentified sources within the Biden administration said last week that the government is developing a strategy to address the economic, regulatory, and national security challenges posed by Bitcoin and other cryptocurrencies. The administration is reportedly also examining the opportunities created by the rise of digital assets, with the Biden administration's strategy potentially being made public as soon as February.

This likely report from the administration, while welcomed by those who believe that Bitcoin can benefit from greater regulatory certainty, has triggered some traders to sell their Bitcoin holdings. Bitcoin's price drop from more than $68, to current levels just above $37, is equivalent to the cryptocurrency losing nearly half its value.

The price of Bitcoin is also being affected by policy changes by the U.S. Federal Reserve. Federal Reserve Chair Jerome Powell said in December last year that the Federal Open Market Committee (FOMC) would double the monthly rate at which it reduces asset purchases. The Federal Reserve is now purchasing $20 billion less of U.S. Treasury securities each month and reducing by $10 billion each month its purchases of U.S. agency securities.

In his post-meeting press conference on Jan. 26, , Powell indicated that the FOMC will adhere to the bond purchase schedule that it announced in December While the fed funds rate is being kept near zero for now, developments related to inflation may change that. Keeping elevated inflation levels from becoming "entrenched" remains a key focus for the Fed.

Measures enacted by the Fed that are designed to control inflation have had a negative impact on the price of Bitcoin. The values of risky assets—like Bitcoin—tend to decline in the wake of the Federal Reserve making policy changes to become more fiscally conservative.

More broadly, as Bitcoin matures and becomes more widely adopted, the price of Bitcoin is increasingly correlated with the prices of traditional assets like stocks. This growing correlation means that any event that triggers price declines in the traditional markets is likely to trigger similar or greater price declines for Bitcoin.

The Dow Jones Industrial Average on Tuesday lost more than points before rebounding to post a loss at closing of less than points. Similarly, the S&P lost nearly 3% of its value before rebounding to post a loss of less than 50 points. The Nasdaq Composite Index, which tracks all of the stocks listed on the Nasdaq stock exchange, lost more than 3% of its value at the session low on Tuesday. Several non-U.S. indexes are also experiencing volatility and price declines.

Publicly traded companies with significant exposure to Bitcoin have been experiencing notable price declines. The stock prices on Monday of both Coinbase Global, Inc. (COIN) and MicroStrategy Incorporated (MSTR) declined by more than 15% at their session lows, although prices of both stocks stabilized somewhat on Tuesday. While Coinbase, as a cryptocurrency exchange, has direct operational exposure to Bitcoin, MicroStrategy is an enterprise software company that holds billions of dollars of Bitcoin on its balance sheet.

Should Bitcoin Investors Panic?

Bitcoin investors may not need to panic about the recent market sell-off, but it's important to understand the factors affecting Bitcoin's price movements. Rumors and government policy changes aside, investors should expect that the prices of Bitcoin and other digital assets will increasingly move in correlation with the prices of traditional assets.

Little-known cryptocurrencies may continue to trade at prices that are uncorrelated with the prices of traditional assets, but the same may not be true for the most-established cryptocurrencies like Bitcoin and Ethereum. Bitcoin investors concerned about the cryptocurrency's price can benefit from monitoring developments related to both Bitcoin and the broader financial market.

Ric Edelman, founder of the Digital Assets Council of Financial Professionals, told Investopedia that "this is the fifth time Bitcoin's price has fallen by 50% or more since its inception in " While the most recent sell-off may not be a reason to part with your Bitcoin, the cryptocurrency's "massive price volatility reflect[s] the fact that this is still a new, emerging asset class, and experiencing growing pains." Edelman also notes that many investors "still view the long-term outlook [for Bitcoin] favorably," despite significant price volatility being "an inherent feature of Bitcoin."

Meanwhile, more regulation of Bitcoin and other digital assets may be forthcoming. The Federal Reserve on Thursday released a research report that explores the creation of a digital version of the U.S. dollar.

As of this writing, Bitcoin is currently trading at around $37,, down approximately 45% from its high posted in November

In recent weeks Bitcoin's price has seemed to continue marching higher. But what is driving this growth? It turns out there are a wide variety of factors that continue to make Bitcoin rise in value.

Previous Resistance

Bitcoin has seen extremely volatile peaks and troughs in its time. Its last peak was near $14, in June of At this point, Bitcoin experienced a hard resistance and it failed to push through this stage.

If Bitcoin were to break through that resistance in June it would have likely triggered a bull market. Unfortunately, for Bitcoin bulls, it failed to do so and cascaded down to a low point of nearly $3,

In October, Bitcoin retested this resistance point only to fall back down. On November 4th, Bitcoin pushed straight through $14, and continued higher. This is significant because Bitcoin's next resistance point is its previous all-time high of $20,

With Bitcoin no longer having a theoretical resistance point until its previous all-time high of $20,, many investors have become bullish that the cryptocurrency will be able to retest that price point or even push past it. This speculation has lead to an increase in Bitcoin's value.

Inflation and the Rush Toward Safe-Haven Assets

Another reason for Bitcoin's rise is the growing inflation of the U.S. dollar. While inflation is on average 2% each year, recent stimulus spending is poised to greatly increase the level of inflation and decrease the dollar's purchasing power.

With the recent stimulus packages, the United States has added around $ trillion to the economy. This has many worrying about the inevitable decrease in the dollar's purchasing power and the rise in inflation.

To hedge against this rising inflation, many have retreated from the dollar and have taken shelter in assets that historically have held value or have even appreciated in value. Typically, assets that people convert their dollars into to avoid inflation or volatile markets are ones that are scarce or are less volatile in general. These 'safe-haven' assets include things like precious metals, stocks in sectors that are generally less volatile, and more recently, Bitcoin.

Adoption as a Means of Payment

Another reason for Bitcoin's price appreciation is its growing adoption as a payment method. Recently, PayPal (PYPL) announced that it would soon allow its users and merchants to buy, sell, hold, and accept Bitcoin and other cryptocurrencies as a form of payment.

This news pushed Bitcoin's price higher immediately. PayPal has nearly million users who will now have the ability to easily buy, store, and use Bitcoin. PayPal also has well over 20 million active merchants who can now accept the currency.

Aside from PayPal, this has further implications. PayPal also owns the widely popular payment app, Venmo. Venmo has more than 40 million active accounts, making the accessibility to Bitcoin and other cryptocurrencies even more significant.

While PayPal and Venmo are newer to crypto, there are a host of other applications that allow its users to buy, sell, and hold. Popular competitors to PayPal and Venmo, Square (SQ) and CashApp, also accept cryptocurrencies making the audience to Bitcoin even wider.

Institutional Investment

As discussed above, there is a growing narrative of Bitcoin as a safe-haven asset. In the current societal and economic climate there is a growing incentive to hold less cash and be hedged against intense market swings.

Recently, a trend started where publicly traded companies were beginning to convert cash in their treasuries over to Bitcoin as a more sound store-of-value. Most notably, MicroStrategy, a business analytics company, converted $ million worth of cash in its treasury to Bitcoin. Shortly after the payments company Square made a $50 million purchase.

Since then, a number of companies have followed suit. The confidence that these companies and their investors have in Bitcoin has given increased merit to the concept of Bitcoin as a store-of-value and safe-haven asset.

Halving and the Stock-To-Flow Model

Perhaps the most important reasons for the rise in Bitcoin's price are two attributes that are inherent in its design.

The first: there is only 21 million Bitcoin that will ever exist. There will be no more and no less and this number will always stay static. This makes bitcoin more scarce than anything that has come before it. Other scarce assets are not % finite and in some cases, they can be synthetically manufactured.

The second is a process coded into Bitcoin called the halving. Essentially, Bitcoin has its own built-in escrow mechanism where Bitcoin is released and given to miners as a reward for processing transactions. This reward is cut in half every four years.

By doing so, Bitcoin's rate of inflation is reduced by half each halving and its stock-to-flow ratio is doubled each halving. This process continues every four years until all Bitcoin in this escrow mechanism is released and in circulation. From that point on Bitcoin in circulation will be capped at 21 million. As of the time of writing, there are 18,, in circulation.

So far, Bitcoin's price has followed its stock-to-flow ratio very closely and if it were to continue on this trajectory Bitcoin's value could be somewhere around $, in late

Rising Cost of Production

Another reason for Bitcoin's rise is that as the size of mining network grows, so does the mining difficulty -- which, in turn, increases the marginal cost to produce a bitcoin. Bitcoin mining requires a great deal of energy, and this has a real cost that must be paid by miners in their local currency. Because Bitcoin's protocol mandates one block be found, on average, every ten minutes, the more hashing power directed at mining does not increase the rate of new supply - it only increases the difficulty of mining. Research has shown the the price of a bitcoin has closely tracked its marginal cost of production.

Cryptocurrency Performance for

returns -

• Bitcoin (BTC): +%
• Ethereum (ETH): +%
• Ripple (XRP): +%
• Bitcoin Cash (BCH): +%
• S&P : +%

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") can be highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Understanding Cryptocurrencies

Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all ecommerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.

Blockchain

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction www.oldyorkcellars.com contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.

Types of Cryptocurrency

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in There are thousands of cryptocurrencies present in the market today.

Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies.

Bitcoin, which was made available to the public in , remains the most widely traded and covered cryptocurrency. As of November , there were over million bitcoins in circulation with a total market cap of around $ trillion. Only 21 million bitcoins will ever exist.

In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November , the aggregate value of all the cryptocurrencies in existence had reached over $ trillion—Bitcoin represented approximately 41% of that total value.

Are Cryptocurrencies Legal?

Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.

But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June , the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.

As of December , El Salvador was the only country in the world to allow Bitcoin as legal tender for monetary transactions. In the rest of the world, cryptocurrency regulation varies by jurisdiction.

Japan's Payment Services Act defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.

Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as "financial instruments." In June , the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies. Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities.

Advantages and Disadvantages of Cryptocurrency

Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.

Some advantages and disadvantages of cryptocurrencies are as follows.

Advantages

• Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in by the failure of institutions in the United States.
• Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.
• Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.
• Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of Dec. 20, , Bitcoin was valued at more than $ billion in crypto markets.
• The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders and, subsequently, converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.

Disadvantages

• Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens.
• Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
• In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11, investors held roughly 45% of Bitcoin's surging value.
• One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. According to an MIT study, 10% of miners account for 90% of its mining capacity.
• Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen.
• Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has experienced rapid surges and crashes in its value, climbing to as high as $17, in December before dropping to $7, in the following months. Some economists thus consider cryptocurrencies to be a short-lived fad or speculative bubble.

Frequently Asked Questions

Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

What Is Cryptocurrency?

Cryptocurrency is digital money. This type of currency uses blockchain technology, which is considered secure because it is capable of establishing distributed consensus even among untrustworthy parties. Cryptocurrency blockchains resemble old-fashioned bookkeepers' ledgers, except that the ledger is electronic, and everyone with access to the ledger can also be the bookkeeper, bitcoin investopedia today.

Investors worldwide have invested and are starting to invest in cryptocurrency. Though Bitcoin is likely the best-known digital money, thousands of cryptocurrencies already exist. Cryptocurrency can be considered one of bitcoin investopedia today newest and most exciting asset classes available to investors.

Understanding Cryptocurrency Investing

When you think of investing in cryptocurrency, you might think about buying and holding one or more bitcoin investopedia today coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:

• Buy cryptocurrency directly: You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released in an initial coin offering (ICO).
• Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency, bitcoin investopedia today. Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets, Inc. (HOOD) and PayPal Holdings, Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure. You can also invest in companies like MicroStrategy Incorporated (MSTR), which hold large amounts of cryptocurrency on their balance sheets.
• Invest in cryptocurrency-focused funds: If you don't want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts. Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities such as futures contracts.
• Invest in a cryptocurrency IRA: If you want to invest in cryptocurrency and also garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency IRA. Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
• Become a crypto miner or validator: Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators earn rewards in crypto, which they can either hold as investments or exchange for another currency.
  

How Cryptocurrency Investing Works

If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. Here's how to buy cryptocurrency through an exchange:

1. Choose which cryptocurrency exchange you want to use. Your best bet is a reputable, well-known exchange with a large bitcoin investopedia today of currencies.
2. Establish an account with the cryptocurrency exchange. You will need to provide your personal information and verify your identity to complete the registration process.
3. Fund your account with fiat money. Before you can buy any crypto, you need to fund your exchange account with another currency such as U.S. dollars.
4. Decide which cryptocurrency you want to buy. You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.
5. Place a buy order for your chosen cryptocurrency. Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.
6. Store your cryptocurrency in bitcoin investopedia today digital wallet. After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.

A best practice among investors is to periodically review your entire portfolio to perhaps rebalance your holdings, bitcoin investopedia today. That might mean increasing or scaling back your crypto bitcoin investopedia today, depending on your investment goals and other financial needs.

What to Know Before Investing in Cryptocurrency

Investing in cryptocurrency is considered risky. The prices of cryptocurrencies, even the most established cryptocurrencies, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the possibility that cryptocurrency becomes illegal and therefore worthless, bitcoin investopedia today.

Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest in cryptocurrency, it's important to carefully research any digital coin before buying it. Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.

The cryptocurrency space is evolving rapidly, so it's also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.

Given the riskiness of cryptocurrency as an asset class, it's especially important not to invest more money in crypto than you can afford to lose.

Frequently Asked Questions

After its launch inBitcoin ushered in a new era of blockchain technology and digital currencies, bitcoin investopedia today. Given all the talk about Bitcoin, you'd think it would be everywhere. Is that really true? How much is Bitcoin worth? Perhaps more importantly, how much of the world's money is in bitcoins? With the price of BTC at $54, as of Nov. 26,it is certainly worth our time to figure it out.

How Much Is Bitcoin Worth?

We will calculate the total value of Bitcoin first because that is the easy part. Bitcoin investopedia today to CoinMarketCap, the value of all the bitcoins in the world was over $ trillion as of Nov. 26, For comparison, Forbes estimated the net worth of Amazon (AMZN) founder Jeff Bezos at $ billion. That makes the market cap of Bitcoin over five times larger than Bezos' fortune, bitcoin investopedia today.

Bitcoin and the Money Supply

To get a sense of how much of the world's money is in bitcoins, we must determine the total amount of money. As it turns out, this is not the easiest question to answer. Such a calculation might take into account dozens of categories of wealth, including banknotes, precious metals, bitcoin investopedia today, money market accounts, and debt. The Money Bitcoin investopedia today attempted this computation in May of and estimated bitcoin investopedia today $ trillion in global narrow money.

Bitcoin investopedia today leaves Bitcoin at about % of the estimated value of narrow money from The Money Project's report.

Bitcoin vs. Gold

How does Bitcoin compare to gold? After all, some people still consider gold to be the safest of safe haven assets. It is certainly the gold standard to which other currencies must be compared. We begin with the World Gold Bitcoin investopedia today figures. They estimated that abouttonnes of gold had been mined throughout history as of the end of An average of around 2, tonnes are mined per year, bitcoin investopedia today, so we can safely estimate aroundtonnes of gold in existence as of Nov. 26, There are 32, troy ounces of gold in one tonne, and the price of gold per ounce is about $1, as of Nov. 26, So, we can estimate the total value of all gold as:

tonnes of gold x 32, troy ounces per tonne x $1, per ounce = $ trillion, bitcoin investopedia today.

In total, bitcoin investopedia today, the value of all Bitcoin was about 9% of the value of all gold.

Other Cryptocurrencies

Bitcoin is the largest and best-known cryptocurrency in the global economy. However, it is far from the only one. If we combine Bitcoin with Skills money making guide, Monero, Ethereum, and all other significant cryptocurrencies, the total value comes to roughly $ trillion. That is about 7% of the value of all narrow money given above.

Bitcoin’s Percentage of All Money FAQs 

What percentage of all money is Bitcoin?

As of Nov. 26,the combined market value of all existing bitcoins (market capitalization) was equivalent to % of the combined value of the world's narrow money supply.

What is the total value of all bitcoins?

As of Nov. 26,the combined market value of the world's bitcoins totaled over $ trillion.

For how much does Bitcoin sell?

Bitcoin prices are highly volatile and subject to market fluctuations. As of Nov, bitcoin investopedia today. 26,the global market price of a bitcoin was $54,

How much money is there in the world altogether?

Based on estimates from The Money Project, the combined value of all the world's narrow money (coins, currency, bitcoin investopedia today, demand deposits, and other assets held by central banks) was worth $ trillion as of May 27,

How much money is in the U.S.?

According to the Federal Reserve Bank of Bitcoin investopedia today. Louis, the M1 Money Supply, or the total amount of money in the U.S., was $ trillion in

Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations bitcoin investopedia today warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, what companies should i invest in uk author does not own cryptocurrency.

It has been a year of highs for bitcoin and cryptocurrencies. After surpassing the $5, mark, bitcoin investopedia today, bitcoin is poised to surpass $6, next. As of this writing, bitcoin is trading at $5, Cumulatively, it is up by % since the start of this year.

A bunch of cryptocurrencies, including ethereum and litecoin, have imitated bitcoin’s trajectory and racked up gains ranging from 4,% to 1,% respectively. Besides the inherent dynamics of cryptocurrencies (there is a limited number of them in the market), other factors are at work in raising their prices. 

Here are two factors influencing bitcoin’s price right now.

Interest From Institutional Investors

A recent Bank of America report attributes the increased value of cryptocurrencies to interest by institutional investors. As financial services companies begin offering cryptocurrencies in custom products, Bank of America predicts that it could affect the “liquidity and market capitalization for such currencies.”

European institutions have taken the lead in designing new products using cryptocurrencies. For example, investors can track ethereum’s price using exchange-traded notes in Nasdaq’s Sweden exchange. Switzerland’s financial regulation authority has approved a product from Falcon Bank that enables its clients to trade in bitcoin. U.S. banks are following suit.

Goldman Sachs is said to be considering bitcoin trading while JP Morgan launched a payment network based on ethereum’s blockchain yesterday. These moves could translate into another price increase across the board.

Interest From Asia

South Korea and China may have clamped down on bitcoin, but that hasn’t tamped investor interest in the cryptocurrencies. (See also: After China, South Korea Bans ICOs). According to reports, investors in both countries are paying a premium to invest in bitcoin and cryptocurrencies. In fact, bitcoin investopedia today, some bitcoin trades through China’s OKCoin exchange have already surpassed the $6, value. 

South Korea’s regulation has resulted in limited numbers of cryptocurrencies and high demand. The result is that the Asian country has become the largest market for ethereum. Demand from Japan, which recognized bitcoin as legal tender earlier this year, could also drive up prices for cryptocurrencies. (See also: Bitcoin Gets Boost From Japan.) 

What Determines Bitcoin’s Price?

Bitcoin (BTCUSD) is a cryptocurrency developed in by Satoshi Nakamoto, the name given to the unknown creator (or creators) of this virtual currency. Transactions are recorded in a blockchain, bitcoin investopedia today, which shows the transaction history for each unit and proves ownership.

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government. And buying a bitcoin is different from purchasing a stock or bond, because Bitcoin is not a corporation. Consequently, there are no corporate balance sheets or Form Ks to review.

Understanding What Determines Bitcoin’s Price

Unlike investing in traditional currencies, Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to Bitcoin. Conversely, Bitcoin prices are influenced by the following factors:

• The supply of Bitcoin and the market’s demand for it
• The cost of producing a bitcoin through the mining process
• The rewards issued to Bitcoin miners for verifying transactions to the blockchain
• The number of competing cryptocurrencies
• Regulations governing its sale and use
• The state of its internal governance
• News developments

Supply 

The supply of an asset plays an important role in determining its price. A scarce asset is more likely to have high prices, whereas one that is available in plenty will have low prices. Bitcoin’s supply has been dwindling since inception. The cryptocurrency’s protocol only allows bitcoin investopedia today bitcoins to be created at a fixed rate, and that rate is designed to slow down over time. Thus, the supply of Bitcoin slowed from % in to % in and 4% in Bitcoin halving events, which occur every four years, generally correspond to a significant bump in its prices because it means that the cryptocurrency’s supply has bitcoin investopedia today reduced. 

Demand 

While Bitcoin has yet to find favor as a medium of exchange, it has attracted the attention of retail bitcoin investopedia today. The locus of Bitcoin’s demand shifts based on economic and geopolitical considerations. For example, China’s citizens may have reportedly used the cryptocurrency to circumvent capital controls in Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. It is also popular with criminals who use it to transfer large sums of money for illicit activities. Finally, investor demand for the cryptocurrency has also risen with increased media coverage. 

All of this means that shrinkage in supply has coupled with a surge in demand, bitcoin investopedia today, acting as fuel for bitcoin prices. Alternating periods of booms and busts have become a feature of the cryptocurrency ecosystem. For example, a run-up in bitcoin’s prices in was succeeded by a prolonged winter.

Cost of Production 

Just as for other commodities, the cost of production plays an important role in determining the bitcoin investopedia today of bitcoin. According to research, bitcoin’s price in crypto markets is closely related to its marginal cost of production.

For bitcoin, the cost of production is roughly a sum of the direct fixed costs for infrastructure and electricity required to mine the bitcoin investopedia today and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of miners competing to solve a complex math problem—the first miner to do so wins bitcoin investopedia today reward of newly minted bitcoins and any transaction fees that have accumulated since the last block was found.  

Arriving at a solution to the problem requires brute force in the form of considerable processing power, bitcoin investopedia today. In monetary terms, this means the miner will have to spend money on racking mining machines equipped with expensive processors. The bitcoin-mining process also incurs costly electricity bills.

According to estimates bitcoin investors dies photo some sites, electricity consumption for the bitcoin-mining process is equal to or more than that of entire countries. An indirect cost of bitcoin mining is the difficulty level of its algorithm. The varying difficulty levels of bitcoin’s algorithms can hasten or slow down the rate of bitcoin production and affect its overall bitcoin investopedia today, thereby affecting its price.

Competition 

Though Bitcoin is the most well-known cryptocurrency, bitcoin investopedia today, hundreds of other tokens are vying bitcoin investopedia today crypto investment dollars. As ofBitcoin dominates trading in cryptocurrency markets. But bitcoin investopedia today dominance has waned over time. Bitcoin investopedia todaybitcoin investopedia today, Bitcoin accounted for more than 80% of the overall market capitalization bitcoin investopedia today crypto markets. Bybitcoin investopedia today, that share was down to less than 50%.

The main reason for this was an increase in awareness of and capabilities for alternative coins. For example, Ethereum’s Ether (ETHUSD) has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) tokens, bitcoin investopedia today. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether, the cryptocurrency used as “gas” for transactions on bitcoin investopedia today network. On Oct. 13,Ethereum accounted for almost 18% of the overall market bitcoin investopedia today of cryptocurrency markets.

Ripple’s XRP (XRPUSD) and Cardano’s ADA (ADAUSD) have also surged in popularity, while growth in stablecoins had attracted investor attention toward Binance’s BNB token (BNBUSD).

Even though it has siphoned away investment dollars from the Bitcoin ecosystem, bitcoin investopedia today, competition has also attracted investors to the asset class. As a result, demand and awareness about cryptocurrencies have increased. As a standard-bearer of sorts for the cryptocurrency ecosystem, Bitcoin has benefited from the attention, and its prices have surged.

Regulatory Developments 

Bitcoin was released in the aftermath of a financial crisis precipitated by the loosening of regulations in the derivatives market. The cryptocurrency itself remains mostly unregulated and has garnered a reputation for its border- and regulation-free ecosystem.

Bitcoin’s lack of regulatory status has its benefits and drawbacks. On one hand, the absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies. On the other hand, it also means that Bitcoin use and trade can invite criminal consequences in most financial jurisdictions. The vast majority of institutional investors are still wary of putting their money into the asset class, resulting in less liquidity and more volatility for its ecosystem.

The more governments around the world incorporate bitcoin into their economies and markets, the greater its chances of becoming a legitimate asset class for investment. Cryptocurrency investors and traders follow regulatory developments related to Bitcoin closely because it is an bitcoin investopedia today of liquidity in crypto markets. These developments exert pressure on its price because they affect its supply and demand.

For example, China’s moves to ban bitcoin trading and limit operations of bitcoin-mining infrastructure affect the cryptocurrency’s supply and demand.

In the United States, cryptocurrency rulings delivered by the Securities and Exchange Commission (SEC) often have a direct impact on the price of Bitcoin. For example, bitcoin investopedia today, in Octoberthe price of Bitcoin surged above $66, the day after the SEC allowed trading of the first U.S. bitcoin-related ETF: the ProShares Bitcoin Strategy ETF (BITO).

News Developments 

Bitcoin’s nascent ecosystem means that news developments have a direct impact on its price, bitcoin investopedia today. These developments can be of various types.

As mentioned earlier, regulatory news can move the cryptocurrency’s prices substantially. Bitcoin investopedia today and soft forks, which alter the number of bitcoins in existence, can also change investor perception of the cryptocurrency. For example, the forking of Bitcoin’s blockchain into Bitcoin Cash in August resulted in price volatility and spurred the valuation of both coins.

Bitcoin’s governance policies, which are set by a group of core developers, also affect its price, bitcoin investopedia today. Protocol modifications that alter the number of bitcoin in existence or philosophical disagreements among developers about the cryptocurrency’s future direction are closely watched investor indicators.

The Bottom Line 

Even though it has been around for more than a decade, Bitcoin is still a nascent asset class. That means its price is determined by a complex combination of factors that include production costs, competition, and regulatory developments, bitcoin investopedia today. The cryptocurrency’s technological roots mean that other factors—such as the difficulty levels of its algorithms and forks on its blockchains—can also play important roles in determining its price.

Bitcoin (BTCUSD) is often referred to as digital currency and as an alternative to central bank-controlled fiat money. However, the latter is valuable because it is issued by a monetary authority and is widely used in an economy, bitcoin investopedia today. Bitcoin's network is decentralized, and the cryptocurrency is not used bitcoin investopedia today in retail transactions.

One can argue that Bitcoin's value is similar to that of precious metals. Both are limited in quantity and have select use cases. Precious metals like gold are used in industrial applications, while Bitcoin's underlying technology, the blockchain, has some applications across the financial services industries. Bitcoin's digital provenance means that it might even serve as a medium for retail transactions one day.

Why Traditional Currencies Have Value

There are six key attributes to a useful currency: scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). These qualities allow a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.

Currency is useful if it works as a store of value or, bitcoin investopedia today, to put it bitcoin investopedia today, if it can reliably maintain its relative value over time. Throughout history, many societies used commodities or precious metals as methods of payment because they were considered to have a relatively stable value.

Rather than carry around cumbersome quantities of cocoa beans, gold, or other early forms of money, bitcoin investopedia today, societies eventually turned to minted currency as an alternative, bitcoin investopedia today. The first such currencies used metals like gold, silver, and bronze, which had long shelf lives and little risk of depreciation.

Assigning value to currencies is a matter of debate. Initially, bitcoin investopedia today, their value came from intrinsic physical properties. For example, bitcoin investopedia today, gold's value comes from the costs of extraction and certain qualitative factors, such as luster and purity content.

In the modern age, government-issued currencies often take the form of paper money, which does not have the same intrinsic scarcity as precious metals. For a long time, the value of paper money was determined by the amount of gold backing it. Even today, some currencies are "representative," meaning that each coin or note can be directly exchanged for a bitcoin investopedia today amount of a commodity.

The idea of a currency's value began changing in the 17th century. Prominent Scottish economist John Law wrote that money—currency issued by a government or monarch—"is not the value for which goods are exchanged, but the value by which they are exchanged." In other words, the value of a currency is a measure of its demand and its ability to stimulate trade and business within and outside an economy.

This thinking hews closely to the modern credit theory ways to make money photography monetary systems. In this theory, commercial banks create money (and value for currencies) by lending to borrowers, who use the money to purchase goods and cause currency to circulate in an economy.

After countries abandoned the gold standard in an effort to curb concerns about gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that others will accept that currency.

Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least susceptible to loss of value over time. The value of fiat currencies is a function of their demand and supply. The U.S. dollar bitcoin investopedia today considered valuable because the world's biggest economy uses it and it dominates the flow of payments in international trade.

The Value of Digital Currencies

Any bitcoin investopedia today about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to bitcoin investopedia today inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.

Here's an example. During the financial crisis, Ben Bernanke, who was then the governor of the Federal Reserve, appeared on CBS' 60 Minutes and explained how the agency "rescued" insurance giant American International Group (AIG) and other financial institutions from bankruptcy by lending money to them. Puzzled, the interviewer asked whether the Fed had manufactured billions of dollars. That wasn't quite the case.

"So, to lend to a bank, bitcoin investopedia today, we simply use the computer to mark up the size of the account that they have with the Fed," explained Bernanke. In other words, the Fed "manufactured" U.S. dollars through entries in its ledger. This ability to "mark up" an account exemplifies the nature of currencies bitcoin investopedia today their digital form. It has implications for the velocity and use of currencies because it simplifies and streamlines transactions involving them, bitcoin investopedia today.

Why Does Bitcoin Have Value?

Bitcoin investopedia today does not have the backing of government authorities, nor does it have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network. There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, bitcoin investopedia today, if a transaction goes awry.

The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce, and bitcoin investopedia today be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend. This refers to a situation in which bitcoin investopedia today user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.

Utility

What makes double-spending unlikely, though, is the size of the Bitcoin network. A so-called 51% attack, in which a group of miners theoretically control more than half of all network power, would be necessary. By controlling a majority of all network power, this group could dominate the remainder of the network to falsify records. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely.

But Bitcoin often fails the utility test because people rarely use it for retail transactions. The main source of value for Bitcoin is its scarcity. The argument for Bitcoin's value is similar to that of gold—a commodity that shares characteristics with the cryptocurrency. The cryptocurrency is limited to a quantity of 21 million.

Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with constituent units called satoshis. Most fiat currencies can only be divided into two decimal places for everyday use.

If Bitcoin's price continues to rise over time, users with a tiny fraction of a bitcoin will still be able to make transactions with the cryptocurrency. The development of side channels, such as the Lightning Network, may further boost the value of Bitcoin's economy.

Scarcity

Bitcoin's value is a function of this scarcity. As the supply diminishes, demand for cryptocurrency has increased. Investors are clamoring for a slice of the ever-increasing profit pie that results from trading its limited supply.

Bitcoin also has limited utility like gold, bitcoin investopedia today, the applications for which are mainly industrial. Bitcoin's underlying technology, called blockchain, is tested and used as a payment system. One of its most effective use cases is in remittances across borders to bump up speed and drive down costs. Some countries, like El Salvador, are betting that Bitcoin's technology will evolve sufficiently to become a medium for daily transactions.

Marginal Cost of Production

Another theory is that Bitcoin does have intrinsic value based on the marginal cost of producing one bitcoin. Mining for bitcoins involves a great deal of electricity, and this imposes a real cost on miners. According to economic theory, bitcoin investopedia today, in a competitive market among producers all making the same product, the selling price of that product will tend towards its marginal cost of production. Empirical evidence has shown that the price of a bitcoin tends to follow the cost of production.

Monetarist Theories

Monetarists bitcoin investopedia today to value bitcoin as they would money, using the supply of money, its velocity, and the value of goods produced in an economy. The simplest way to this approach would be to look at the current worldwide value of all mediums of exchange and of all stores of value comparable to Bitcoin and then calculate the value of Bitcoin's projected percentage. The predominant medium of exchange is government-backed money, and for our model, we will focus solely on that. Roughly speaking, the money supply (M1) in the U.S. was worth more than $20 trillion as of the end of

Assuming this total remains stable, if Bitcoin were to achieve 15% of this valuation, its market capitalization in today's bitcoin investopedia today would be approximately $3 trillion. With all 21 million bitcoins in circulation, that would put the price of 1 bitcoin bitcoin investopedia today roughly $,

The Challenges of Valuing Bitcoin

One of the biggest issues is Bitcoin's status as a store of value. Bitcoin's utility as a store of value depends on how well it works as a medium bitcoin investopedia today exchange. If Bitcoin does not achieve success as a medium of exchange, it will not be useful as a store of value.

Throughout much of its history, speculative interest has been the primary driver of Bitcoin's value. Bitcoin has exhibited the characteristics of bitcoin investopedia today bubble with drastic price run-ups and a craze of media attention, bitcoin investopedia today. This is bitcoin investopedia today to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.

Difficulties surrounding cryptocurrency storage and exchange spaces also challenge Bitcoin's utility and transferability. In recent years, hacks, thefts, and fraud have plagued digital currency.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrency.