Among asset classes, Bitcoin has bitcoin investopedia analysis one of the more volatile trading histories. The cryptocurrency’s first big price increase occurred in when the value of a single bitcoin jumped from just a fraction of a penny to $

The cryptocurrency has undergone several rallies and crashes since it became available. Learn more about Bitcoin's volatility and some reasons why its price acts the way it does.

Bitcoin Price History

The price changes for Bitcoin alternately reflect investor enthusiasm and dissatisfaction with its promise, bitcoin investopedia analysis. Satoshi Nakamoto, the anonymous Bitcoin inventor(s), designed it for use as a medium for daily transactions and a way to circumvent traditional banking infrastructure after the financial collapse.

Since then, the cryptocurrency has gained mainstream traction as a means of exchange and attracted traders who bet against its price changes. It has also morphed into a different investment type—a way to store value and hedge against inflation; additionally, Bitcoin has investments linked to its price.

Though this new narrative bitcoin investopedia analysis prove to hold more merit, the past price fluctuations primarily stemmed from retail investors and traders betting on an ever-increasing price without much grounding in reason or facts.

But Bitcoin's bitcoin investopedia analysis story has changed in recent times. Institutional investors are trickling in as the cryptocurrency markets mature, and regulatory agencies are crafting rules specifically for them. Though Bitcoin pricing remains volatile, it is now a part of the mainstream economy instead of a tool for speculators looking for quick profits.

Here's a quick rundown of Bitcoin's past:

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Bitcoin had a price of zero when it was introduced in On July 17,its price jumped to $ Bitcoin's price rose again on April 13,from $1 to a bitcoin investopedia analysis of $ by June 7,bitcoin investopedia analysis, a gain of 2,% within three months. A sharp recession in cryptocurrency markets followed, and Bitcoin's price bottomed out at $ by mid-November. The following year, its price rose from $ on May 9 to $ by Aug.

proved to be a generally uneventful year for Bitcoin, but witnessed strong gains in price. It began the year trading at $ and reached $ on April 8; an equally rapid deceleration in its price followed, bringing its price down to $ a few weeks later on July 4.

In early October, Bitcoin was trading at $; by December, it had spiked to $1, and fell to $ three days later, bitcoin investopedia analysis. Bitcoin's prices slumped through and touched $ at the start of

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Prices slowly climbed through to over $ by the end of the year. InBitcoin's price hovered around $1, bitcoin investopedia analysis, until it broke $2, in mid-May and then skyrocketed to $19, on Dec. Mainstream money makes the world go round do you love me, governments, economists, and scientists took notice, and other entities began developing cryptocurrencies to compete with Bitcoin.

Bitcoin's price moved sideways for the next two years with small bursts of activity. For example, there was a bitcoin investopedia analysis in price and trading volume in Junewith prices surpassing $10, However, bitcoin investopedia analysis fell to $6, by mid-December.

In the economy shut down due to the COIVD pandemic—Bitcoin's price burst into activity once again. The cryptocurrency started the year at $6, The pandemic shutdown and subsequent government policy fed investors' fears about the global economy and accelerated Bitcoin's rise. At close on Nov. bitcoin investopedia analysis, Bitcoin was trading for $19, Bitcoin's price reached just under $29, in Decemberincreasing % from the start of that year.

–Present

Bitcoin took less than a month in to smash its price record, surpassing $40, by Jan. 7, By mid-April, Bitcoin prices reached new all-time highs of over $60, as Coinbase, a cryptocurrency exchange, went public. Institutional interest further propelled its price upward, and Bitcoin reached a peak of more than $63, on April 12,

By the summer ofprices were down by 50%, hitting $29, at the lowest on July Autumn saw another bull run in September, with prices scraping $52, but a large drawdown took it to $40, about two weeks later.

On Nov. 10,Bitcoin again reached an all-time high, bitcoin investopedia analysis, $68, In early DecemberBitcoin fell to $49, before fluctuating more as uncertainty about inflation continued to spook investors alongside the emergence of a new variant of COVID, Omicron.

Which Factors Influence Current Bitcoin Price?

Like other currencies, bitcoin investopedia analysis, products, or services within a country or economy, Bitcoin and other cryptocurrency prices depend on perceived value and supply and demand. If people believe that Bitcoin is worth a specific amount, they will bitcoin investopedia analysis it, especially if they think it will increase in value.

By design, there will only ever be 21 million Bitcoins created. The closer Bitcoin gets to its limit, the higher its price will be, as long as demand remains the same or increases.

Bitcoins are created by mining software and bitcoin investopedia analysis at a specified rate. This rate splits in half every four years, slowing down the number of coins created. Following the laws of supply and demand, Bitcoin's price should continue to rise as its supply may not be able to meet its demand—as long as it continues to grow in popularity. However, if popularity wanes and demand falls, there will be more supply than demand, and Bitcoin's price should drop unless it maintains its value for other reasons.

Another bitcoin investopedia analysis that affects Bitcoin's price falls in line with supply and demand; Bitcoin has also become an instrument that investors and financial institutions use to store value and generate returns. Derivatives are being created and traded by brokers, investors, and traders, acting to influence Bitcoin's price further. Speculation, investment product hype, irrational exuberance, or investor panic and fear can also be expected to affect Bitcoin's price because demand will rise and fall with investors' sentiments.

Other cryptocurrencies may also affect Bitcoin's price. There are several cryptocurrencies, and the number continues to rise as regulators, institutions, and merchants address concerns and adopt them as acceptable forms of payment and currency. Lastly, if consumers and investors believe that other coins will prove to be more valuable than Bitcoin, demand will fall, bitcoin investopedia analysis, taking prices with it—or demand will rise, along with prices, if sentiments change in the opposite direction.

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 bitcoin investopedia analysis 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. Bitcoin investopedia analysis 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/does not own cryptocurrency.

Bitcoin's Rise

Bitcoin remains the leading decentralized cryptocurrency, bitcoin investopedia analysis, which has over the past decade increased interest in potential applications using its core blockchain technology. Yet, bitcoin investopedia analysis, in an extremely dynamic (and often volatile) market, Bitcoin has also found its fair share of competitors—including other digital tokens like EOS, Cardano, Ripple, and Ethereum (among many others)—all of which have experienced both bull and bear runs.

Today, the market values of many blockchain-based tokens are in the several million to billions of dollars, with the entire crypto ecosystem worth more than a trillion dollars. Crypto has developed into a major economic force.

So how can one determine what the market sees as a digital coin's fair bitcoin investopedia analysis, or how can one arrive at a Bitcoin valuation? How do you even think of intrinsic value for something that only exists within computer networks, but yet has appreciated in price faster than the shares of even the hottest technology stocks? These questions have befuddled investors and analysts for years when it comes to Bitcoin, with competing views on the topic.

Calculating Bitcoin Fair Value

When it comes to digital currencies, there have been several methods to approach valuation. Most of these approaches differ in how one views the nature of a digital "coin."

Expected-Value Based

For instance, if one views Bitcoins as equivalent to stocks or bonds, pricing models appraise its expected value. Expected value is the discounted value attributed to an investment's payoff in the future. Since Bitcoin does not pay dividends or interest, bitcoin investopedia analysis, the expected value would be due to a strong belief in the underlying technology and its potential to be disruptive or even revolutionary, bitcoin investopedia analysis. This would be a similar approach to valuing a start-up company or young tech stock that does not have any current earnings or profits. Once an expected value is forecast, one can start to make estimates about Bitcoin's current fair value.

Supply and Demand-Based

The value of a bitcoin can alternatively be approached using the principles of supply and demand. Like any other market, the market for Bitcoin achieves price discovery through the interactions of a multitude of buyers and sellers. If there is a high demand that outpaces the number of new bitcoins that are mined, this pushes up the fair price for Bitcoin, bitcoin investopedia analysis.

Like many assets, there is only a limited supply of Bitcoin (21 million ever to be produced by the year ), but unlike other securities that have a finite supply, the new supply of Bitcoin cannot be increased by decree or vote among shareholders or boards of directors. Thus, the price of Bitcoin is fundamentally linked to its scarcity. This makes the value of Bitcoin more akin to a collectible, such as rare baseball cards or artworks.

A different angle on supply and demand looks to stocks versus flows. A stock-to-flow ratio looks at the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. With Bitcoin, bitcoin investopedia analysis, around every four years, the number of bitcoins found in each block mined is reduced bitcoin investopedia analysis 50%. Each halving event thus increases its stock-to-flow ratio since less new supply is created relative to the outstanding stock, bitcoin investopedia analysis.

Since Bitcoin’s inception, its price has tracked this growing stock-to-flow ratio; each halving Bitcoin has been accompanied by a bull market leading to new all-time highs.

Network Effects

If Bitcoin is not viewed as an asset, but instead as a network, its value can arise from the size and robustness of the network itself. The term "network effects" refers to the number of users or nodes mining a cryptocurrency. 

Bitcoin investopedia analysis devised for understanding the value of telecommunication networks, bitcoin investopedia analysis, Metcalfe’s law states that a network’s value is proportional to the number of its users (or nodes) squared. While there are limitations, bitcoin investopedia analysis, this perspective means that as the Bitcoin network grows in size, so should its value.

Cost of Production

One final way to consider Bitcoin's intrinsic value is to view it as a produced commodity, bitcoin investopedia analysis, similar to that of oil or silver. Most commodity prices are driven by their marginal cost of production, or the cost to producers to make one additional unit, bitcoin investopedia analysis. Economic theory states that in a market where many producers of the same product (in this case Bitcoin miners) are competing with one another to sell their product to consumers, this process of competition will drive down the selling price to its marginal cost.

Thus, even if demand falls short of supply, bitcoin investopedia analysis, producers will be reluctant to sell below the cost of production and incur losses. From this view, Bitcoin's price should be driven by similar dynamics.

The major difference between Bitcoin production, and say, mining ore or producing something like chairs or tables, is that an increase in demand cannot spur producers to make more bitcoins—since it is limited to one block to be found around every ten minutes. Thus, bitcoin investopedia analysis, as higher prices in the market spur new and larger miners to join the network, the number of bitcoins made remains the same. What changes is the difficulty level in mining those bitcoins. This rising difficulty maintains a steady minute target between when new blocks are produced.

As a result, the marginal cost of production increases without greater supply. Recent research has shown the cost of production to predict the Bitcoin market quite well over time.

The Bitcoin investopedia analysis Line

The value of Bitcoin is always changing, based on the demand for the cryptocurrency as well as the public perception of how much the coin itself is worth, bitcoin investopedia analysis. It is also changing based on an ever-growing network of miners and users, bitcoin investopedia analysis. As miners join the network, the difficulty for those miners also grows, increasing its cost of production.

Even if we can spot fair value, investing in cryptocurrency remains one of the most volatile investments, meaning, any potential investors must do their due diligence. However, for a chance to make a huge profit (or simply be part of the fun), knowing how to appraise the coin's fair market value will be key.

As of December 16, Bitcoin has increased by about % year-to-date, topping $23, but what is driving this meteoric rise? The reasons for its appreciation vary, but Bitcoin has grown from bitcoin investopedia analysis was once considered a scam by many into something that has matured into a viable investment made by famous billionaire investors, large institutions, and retail investors alike. Why are these investors so bullish on Bitcoin even after it has surpassed all-time highs?

Inflation and the Lowering Purchasing Power of the Dollar

Since the gold standard was removed in by Richard Nixon the amount of circulating dollars has steadily increased. Between the year and just before the coronavirus hit, the total money supply has increased from $ billion to over $4 trillion as of March 9, Since that date, the total money supply has gone from $4 trillion to over $ trillion as of November 30,largely due to coronavirus related stimulus bills, bitcoin investopedia analysis.

Congress is currently in talks to pass another stimulus bill of nearly $1 trillion, bitcoin investopedia analysis, aimed to help those bitcoin investopedia analysis from the coronavirus. Should this new stimulus bill be passed it would mean that since the onset of coronavirus, around 50% of the world's total supply of US dollars will have been printed in

While there are certainly people suffering from a lack of jobs and businesses shutting down, the increase in money supply has significant long-term implications for the purchasing power of the dollar. bitcoin investopedia analysis The stimulus spending has led many to fear far greater inflation rates, and rightfully so. To hedge against this inflation investors have sought assets that either maintain value or appreciate in value. Over the course ofthis search for a store-of-value asset to hedge against inflation has brought them to Bitcoin, bitcoin investopedia analysis. Why? 

There are many assets that are considered bitcoin investopedia analysis store-of-value. Perhaps the most common assets that come to mind are precious metals like gold or other things that have a limited supply. With gold, we know that it is a scarce resource, but we cannot verify with complete certainty how much exists. And, while it may seem far fetched, gold exists outside of earth and may one day be obtainable via asteroid mining as technology advances. 

Why this Matters to Bitcoin

This is where Bitcoin differentiates itself. It is written into Bitcoin’s code how many will ever exist. We can verify with certainty how many exist now and how many will exist in the future. This makes Bitcoin the only asset on the planet that we can prove has a finite and fixed supply. 

In Investopedia’s Express podcast with editor-in-chief Caleb Silver, Michael Sonnenshein, a board member of the Grayscale Bitcoin Trust, said: “The amount of fiscal stimulus that has been injected into the system in the wake of the COVID pandemic to stimulate the economy and get things moving again, Bitcoin investopedia analysis think has really caused investors to think about what constitutes a store of value, what constitutes an inflation hedge and how they should protect their portfolios.” 

Sonnenshein elaborated further saying: “It's important that investors think about that. And I think a lot of them are actually thinking about the juxtaposition between digital currencies, like Bitcoin, bitcoin investopedia analysis, which have verifiable scarcity and thinking about that in the context of Fiat currencies, like the US dollar which seemingly are being bitcoin investopedia analysis unlimitedly.”

Part of Bitcoin’s price appreciation can certainly be attributed to fears of inflation and its use as a hedge against it. With further money printing on the horizon from stimulus packages, as well as talks of student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store-of-value assets more compelling. 

The Halving

To further understand why Bitcoin has a verifiable finite limit to its quantity it is important to understand the mechanism built into its code known as the Halving. Everyblocks that are mined, or about every four years, the reward given to miners for processing Bitcoin transactions is reduced in half. 

In other words, built into Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation. The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are million Bitcoins in circulation, or about % of Bitcoin’s total supply. Why is this important?

As discussed before, the rising inflation and growing quantity of the US dollar lower its value over time. With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its rate of inflation relatively consistent. 

With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly bitcoin investopedia analysis stock being added to circulation each year. Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future. 

Since Bitcoin’s inception, its price has followed extremely close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has absolutely crushed its previous all-time high. 

The first halving, which occurred in November ofsaw an increase from about $12 to nearly $1, within a year. The second Bitcoin halving occurred in July of The price at that halving was about $ and by December 17th,Bitcoin's price had soared to just under $20, The price then fell over the course of a year from this peak down to around $3, a price nearly % higher than Its pre-halving price, bitcoin investopedia analysis. Bitcoin’s third having just occurred on May 11th, and its price has since increased by nearly %.

Bitcoin’s price increase can also be attributed to its stock-to-flow ratio and deflation. Should Bitcoin continue on this trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future. Theoretically, bitcoin investopedia analysis, this price could rise to at least $, sometime in based on the stock-to-flow model shown above.

Some investment firms have made Bitcoin price predictions based on these fundamental analysis and scarcity models. In a leaked CitiFX Technicals analysis Tom Fitzpatrick, the managing director at US Citibank, called for a $, bitcoin investopedia analysis, Bitcoin sometime in Live on Bloomberg Scott Minerd, the Chief Investment Officer of Guggenheim Global called for a $, Bitcoin based on their “fundamental work.”

Institutional Adoption

As discussed, the narrative of Bitcoin as a store of value has increased substantially inbut not just with retail investors. A number of institutions, both public and private, have been accumulating Bitcoin instead of holding cash in their treasuries. 

Recent investors include Square (SQ), MicroStrategy (MSTR), and most recently the insurance giant MassMutual, among many others. In total,Bitcoin now valued at the time of writing at $19,, has been purchased by companies, most of which has been accumulated bitcoin investopedia analysis year. The largest accumulator has been from Grayscale’s Bitcoin Trust which now holdsBitcoin.

Investments of this magnitude suggest strong confidence among these institutional investors that the asset will be a good hedge against inflation as well as provide solid price appreciation over time. 

Aside from companies flat out buying Bitcoin, many companies are now beginning to provide services for them. PayPal (PYPL), for example, has decided to allow crypto access to its over million active users. Fidelity Digital Assets, which launched back in Octoberhas provided custodial services for cryptocurrencies for some time, but they are now allowing clients to pledge bitcoin as collateral in a transaction. The CBOE and the CME Group (CME) plan to launch cryptocurrency products next year. The number of banks, broker-dealers, bitcoin investopedia analysis, and other institutions looking to add such products are too many to name, but in the same way that a company must have confidence in an investment, it must also have confidence that the products that they sell have value.

Central banks and governments around the world are also now considering the potential of a central bank digital currency (CBDC). While these are not cryptocurrencies as they are not decentralized, bitcoin investopedia analysis, and core control over supply and rules is in the hands of the banks or governments, they still show the government’s recognition of the necessity for a more advanced payment system than paper cash provides. This further lends merit to the concept of cryptocurrencies and their bitcoin investopedia analysis in general.  

Maturity

From its initial primary use as a method to purchase drugs online to a new monetary medium that provides provable scarcity and ultimate transparency with its immutable ledger, Bitcoin has come a long way since its release in Even after the realization that Bitcoin and its blockchain tech could be used for way more than just the silk road, it was still near impossible for the average person to get involved in previous bitcoin investopedia analysis. Wallets, keys, bitcoin investopedia analysis, exchanges, the on-ramp was confusing and complicated.

Today, access is easier than ever. Licensed and regulated exchanges that are easy to use are abundant in the US. Custodial services from legacy financial institutions that people are used to are available for the less tech-savvy. Derivatives and blockchain-related ETFs allow those interested in investing but fearful of volatility to become involved. The number of places that Bitcoin and other cryptocurrencies are accepted as payment is growing rapidly. 

In Investopedia’s Express podcast, Grayscale’s Sonnenshein said “the market today has just developed so much more from where we were back then ( peak), we've really seen the development of a two-sided market derivatives options, lending and borrowing futures markets. It's just a much more robust 24 hour two-sided market that is starting to act more and more mature with every day that passes.”

Along with all of this, the confidence showcased by large institutional players by both their offering of crypto-related products as well as blatant investment into Bitcoin speaks volumes, bitcoin investopedia analysis. 99Bitcoins, a site that tallies the number of times an article has declared Bitcoin as dead, now tallies Bitcoin at deaths, with its most recent death being November 18th, and the oldest death being October 15th, With Bitcoin smashing through its all-time-high and having more infrastructure and institutional investment than ever, it doesn’t seem to be going anywhere.

When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Digital currencies have quickly risen to prominence in the portfolios of many retail and institutional investors. At the bitcoin investopedia analysis time, bitcoin investopedia analysis, analysts have continued to caution investors about the volatile nature and unpredictability of cryptocurrencies, bitcoin investopedia analysis.

If you’ve decided to invest in the cryptocurrency market, it’s important—same as with any other investment—to do your research. Below, we’ll explore what you should know before you invest.

Consider Why You Are Investing in Cryptocurrency

Perhaps the most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies.

Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.

Get a Feel for the Industry

It’s essential for investors—particularly those who are new to digital currencies—to develop a sense of how the digital currency world works before investing. Take time to learn about the different currencies offered. Bitcoin investopedia analysis hundreds of different coins and tokens available, it’s crucial to look beyond the biggest names, like Bitcoin, Ether, and Ripple.

In addition, it’s important to explore blockchain technology to get a sense of how this aspect of the cryptocurrency world works.

If you don’t have a computer science or coding background, some aspects of blockchain technology likely will be a challenge for you to parse out. There are many primers on blockchain technology that are written for laypeople.

Once you’ve identified the cryptocurrency (or cryptocurrencies) for investment, look into how those tokens make use of blockchain technology and whether they provide any innovations that differentiate them from the rest. By better understanding cryptocurrencies and money making quotes technology, you’ll be more fully equipped bitcoin investing canada jones determine whether a potential investment opportunity is worthwhile.

Join an Online Community of Cryptocurrency Enthusiasts

Because the digital currency space is such a trendy area, things tend to change and develop quickly. Part of the reason is that a robust and very active community of digital currency investors and enthusiasts are communicating around the clock.

Get plugged into this community to learn about the buzz in the cryptocurrency world. Reddit has become a central hub for digital currency enthusiasts. There are also many other online communities with active discussions going at all times.

Read Cryptocurrency White Papers

More important than word of mouth, though, bitcoin investopedia analysis, are the specifics of a digital currency itself. When you’re considering an investment, take the time to find the bitcoin investopedia analysis white paper. Every cryptocurrency project should have one, and it should be easily accessible (if it’s not, consider that a red flag).

Read the white paper carefully; it should tell you everything about what the developers of the project intend for their work, including a time frame, a general overview, and specifics about the project. If the white paper does not contain data and specific details about the project, that is generally seen as a negative. The white paper is a development team’s chance to lay out the who, what, when, and why of their project. If the white paper feels incomplete or misleading, then it might speak to fundamental issues with the project itself.

Timing Is Key

After diligent research, you have likely bitcoin investopedia analysis a feel for bitcoin investopedia analysis cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile.

On one hand, buying into a hot new currency before it explodes in popularity and value may prompt investors to move equally quickly. In actuality, though, you’re more likely to see success if you monitor the industry before making a move. Cryptocurrencies tend to follow particular price patterns. Bitcoin often leads the way among digital currencies, which tend to follow its general trajectory. News of an exchange hack, fraud, or price manipulation can send shock waves through the cryptocurrency sphere, so it’s important to watch out for what’s going on in the space more broadly.

Finally, remember that digital currencies are highly speculative, bitcoin investopedia analysis. For every overnight bitcoin millionaire, many other investors have poured money into the virtual-token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before making an investment, you help give yourself the best chance of success.

The Bottom Line

When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Analysts continue to caution investors about the volatile nature and unpredictability bitcoin investopedia analysis cryptocurrencies. If you’ve decided to invest in the cryptocurrency market, it’s important—same as with any other investment—to do your research. Consider why you’re interested in this particular investment vehicle, and familiarize yourself with cryptocurrencies and blockchain technology, to be more fully equipped to determine whether this type of investment opportunity is worthwhile for you.

Investing in cryptocurrencies and 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 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 when this article was written, the author owns Bitcoin and Ripple.