The determinants of Bitcoin price (part three)

What kind of asset Bitcoin is? This is a question which still has not a unique answer, neither among traders nor among global watchdogs. The debate on how to classify cryptocurrencies is more open than ever. The following example is significant to depict the confusion which surrounds Bitcoin and the other alt-coins. The U.S. Securities and Exchange Commission classifies cryptocurrencies as securities. Instead, the U.S. Commodity Futures Trading Commission classifies them as a commodity. So, is Bitcoin a security or a commodity? We still don’t know. The problem has been aggravated by the introduction of other financial products that exploit cryptos as an underlying asset, such as the Exchange-traded funds (ETFs), futures, and other kind of derivatives. How this regulatory confusion affect Bitcoin price? Bitcoin derivates allow traders to trade bitcoin, even if they cannot afford to purchase an actual one. As a result, both the interest and the demand for Bitcoin have increased. Furthermore, price volatility is reduced, thanks to institutional investors who use their financial resources to make bets that bitcoin’s price will move in the opposite direction.

Since cryptocurrencies are not issued by a central bank, but created in a decentralized, private way, based on developers and miners to process transactions and keep the blockchain secure, changes to software are also decided in a decentralized way. This is why problems typically take a long time to be resolved. The scalability is another very important key point. The number of transactions that can be processed depends on the size of blocks, and bitcoin software is currently only able to process approximately three transactions per second. The slow transaction speed was not a big problem when the demand for cryptocurrencies was limited. But now the demand has increased, bitcoin community fears that this could incentivize traders to move towards alt-coins, thus provoking dramatic changes in bitcoin price.

The cryptocommunity is trying to find solutions to increase the number of transactions per second, by introducing changes to the rules governing the functioning of the underlying software, the so called “forks”. There are two types of forks, the “soft” and the “hard” ones. The former introduce changes that do not create a new cryptocurrency, while the latter do. Notable examples of new cryptos created through “hard forks” are bitcoin cash and bitcoin gold.

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