Bitcoin operates without a central bank to regulate and influence the currency’s valuation. Instead, Bitcoin runs on a decentralized platform where independent miners offer their computing power to continuously maintain the blockchain ledger.
Central banks have various tools such as interest rates and bonds to increase or reduce inflation, crypto currencies such as Ripple XRP, Ethereum, and even Bitcoin are valued at the whim of the open market.
Despite these hurdles, Bitcoin maintains its value using a system of protocols, hard forks, halving events, and relying on external factors. All of which, Bitcoin CFD traders should take into account before opening a position.
Bitcoin is mined by individuals who maintain the system and uphold the most up to date protocols. In return, for adding blocks to the system, or approving transactions, they are awarded with a certain amount of Bitcoin for each block they process. This reward is cut in half with every 210,000 blocks that are added to the system and are known as ‘halving events’.
In 2009, miners were awarded 50 Bitcoin, in 2013 it was 25, in 2018 it was 12.5, and in 2020, it was reduced 6.25.
The high cost of mining through equipment, electricity, and maintenance requires the selling of Bitcoin to be worthwhile to the Miner. If the value of Bitcoin drops too low, the Miner may either stop mining, or hold on to their Bitcoin until the valuation rises. As demand rises, so too may the valuation of the coin.
Marketplaces consist of buyers and sellers. Ideally, this will create a balance where the amount someone is willing to pay for something is high enough that the seller is willing to part with their goods.
Having more people wanting to purchase Bitcoin usually will drive up the price. Demand for the coin is also impacted by how many marketplaces, such as PayPal, allow users to use the coin.
Unlike Ether or Ripple XRP, which are both intended for use only on specific platforms, Bitcoin was created to be used as an alternative form of currency. This means that it relies on individuals to appreciate its worth by trading or spending it, so its value can keep rising with market demand.
Some people may hold Bitcoin with the intention of using it to make purchases, similar to how we use fiat currencies. Others may purchase Bitcoin with the intention to trade it. Holding on to the coin until the value rises, then exchanging it for Dollars (BTCUSD), Euros (EURGBP), or any other currency. The more a currency is exchanged, the higher potential there is for speculation and volatility.
By owning the underlying asset, it requires the owner to hold the coin, pay maintenance fees, and find a buyer when they are ready to sell. As an alternative, some traders trade CFDs as a way of placing commission-free, leveraged trades where they can open positions to both go long or short on Bitcoin’s valuation.
Forks & Governance
Hard forks, which indicate a major shift in protocol that all network validators must follow, creates the potential for price volatility. There are times that some miners may choose not to switch to the new governing protocols due to a disagreement with them or another reason.
When this happens, all miners who stick to an older protocol are no longer part of the Bitcoin network. Their coins are viewed as a new currency, affecting the availability in the market. This is how Bitcoin Cash was created.
Bitcoin, like other cryptocurrencies, does not have a central bank to regulate its value. This is a feature that many people like most about blockchain technologies but it also lends itself to unpredictable valuations. Traders should remain aware that as greater use cases are created and adoption of these digital coins become more widespread, there are also opportunities for high volatility along with risks.
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