The Cryptopay blog
The Cryptopay blog

Who Really Affect Bitcoin Exchange Rates

Find out how we, you, the investors, governments and backstage fights affect the price of Bitcoin.

As the service affiliated with finances, we often receive inquiries from users who’re concerned by the fluctuations in the Bitcoin exchange rate. Among questions, they have a lot of criticism, since clients tend to blame services like ours in artificially inflate these rates.

At the time I'm writing this, Bitcoin has grown by 15% in just three days, so it's a good chance to tell you how the price is formed.

Who to blame?

I’ve divided all powers that affect bitcoin rates by three huge groups to make the idea easier. First group consists of ordinary Buyers & Sellers, the second are Stock Gamblers and Investors, and the last one is named Global Powers and made of governments, fraudsters and global market events.

It’s time to see how these people and powers affect the market and the overall bitcoin exchange price.

Individual users

As with fiat currencies, ordinary bitcoin users like me and you are able to affect its price. Each transaction we make affects market exchange price. In simple words, when we sell, price slightly goes down, but when we buy coins, price goes a bit up. I define the influence power of the individual user as 1. Compared to other two groups buyers and sellers has the least amount of power on the bitcoin exchange market.

Although the individual alone can't change the exchange rate, big number of buying or selling deals can shift the coin flows. The reverse is also true - changes in usual coin flow directions can cause massive shifts in supply & demand, so the price is going to change anyway.

Individual supply and demand correlation. The price of a bitcoin depends on supply & demand, which can be seen on a some sort of scheme I’ve made below. Of course, in real life individual transactions can’t add a whole cent to the exchange price, so take this as a simplified illustration to the principle.

individual-deals-influence-on-bitcoin-price

One user sold 5 bitcoins, while another one purchased 7. The price went down and then up as demand exceeded supply, then due to other factors it has returned to the same position as before.

This is what happens, when low amounts of money are involved in bitcoin deal. And we’re moving forward to huge financial flows such as investments and stock gambling.

Stock Gamblers & Investments

It was actually the matter of time for bitcoin to appear on gambling markets and became an investment tool. Overall, this is a special case of the previous situation, where the price for the coin was controlled by the users themselves. The only difference is gamblers and investors can operate with huge amounts of money and therefore their deals has more influence power over the individual purchases, let's say about 50.

Investments usually go to bitcoin- and IT-related startups, which in general are dedicated to the improving of the blockchain technology. Implemented know-hows and tools increase the trust to the network, which in its turn increases or downgrades the exchange rate.

Gamblers are those who speculate on currency using major exchangers like Bitstamp. Similarly to investors, they also have the control over huge amounts of money making them another force to be reckoned. But even combined gamblers and investors has less power than governments, hackers and global powers.

Investments influence. Here's an average USD market price graph made by blockchain.info for the 2015. Let's mark two major investments, so we can illustrate how them affected exchange price.

major-investments-affected-bitcoin-price-2015

As you can see, huge amounts of money generated by bitcoin-related project increase trust and therefore exchange prices for some period of time.

Unlike individual deals, investments has a lot of influence on bitcoin exchange rates.

Global powers and controversy

Are you still sure that your government isn't in control of bitcoin? Well, forget it.

Although they can't actually control exchange prices or transactions, as they do with national currencies, they can affect it in other ways. At first, they simply ban bitcoin, which doesn't mean all people won't actually use it, but inflicts a huge reduce in trust to the currency in the local area.. Prohibitions are often accompanied by a propaganda that claims and create events, where cryptocurrencies are a tool in terrorists' or hackers' hands. The huge downfall in trust on the one side of the world couldn't but affect the other side. That's when we have reductions.

Ponzi-schemes are another example of huge structures influencing bitcoin market. While the most developed countries has strict legislation over financial pyramids and frauds, the rest of the world's still in danger. For example, rumours in the web connect the recent increase in bitcoin price to the bankruptcy of the famous MMM created by the famous Sergei Mavrodi (previously convicted for financial frauds in Russia) in Zimbabwe and Nigeria.

Hacks and other security breaches, including phishing and steals harm the user trust rate and therefore also affect the bitcoin exchange price. For example, famous incident with MT Gox bankruptcy decreased the price by 30% in only a few days.

The last component are global events, such as wars, conflicts and rebellions. While there's no direct connection with the tornado in Oregon and bitcoin price fluctuation in Australia, global disasters can destroy data centres and destabilize situation on currency markets. In this circumstances, cryptocurrencies lead over the fiat, since they aren't tied to the nation or country.

Considering all written above, I define the influence power of governments and global events to 85, which is the largest between three groups.

How the world turns. From Brexit to Donald Trump election, bitcoin exchange rate was very responsive to all major events that happened in 2016.

events-affected-bitcoin-price-in-2016

Notice how the Bitcoin halving, when currency was divided by Bitcoin Core and Bitcooin, dropped its price. Same thing happens almost every week — prohibitions, agreements, finaclial crises all affect the price you see on the exchange platform tomorrow.

Bitcoin is alive

Now you know that Bitcoin price is very sensitive to shifts in supply & demand and different groups of users can affect it. Because these groups act simulteniously, it's hard to tell exactly who's spoiled the game.

So, before scorching the flame on forums, think — maybe your own selling or buying deals are guilty for 30% drop or 5% increase in the Bitcoin exchange price that morning.

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