Why Does the Bitcoin Price Fall and Rise?

Just as the prices of stocks and currencies move up and down due to various reasons, the price of Bitcoin as well fluctuates. As a Bitcoin investor, you must be prepared to let your investments ride the wave of volatility. We have covered the following in this article:

Latest updates – Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency. 
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition. 

Union Budget 2022 Outcome: 

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

What exactly is Bitcoin?

Bitcoin is the most popular crypto or virtual currency in the world. It is a decentralised currency that has no central bank or government as the regulator. It first came into use in 2009 and has gained wide acceptance lately. Since more corporates and individuals are accepting Bitcoin as legal tender each day, its price is soaring to greater heights. Naturally, many individuals get this question in their mind- why does the Bitcoin price fall and rise?

What drives the movement of the Bitcoin price?

There are several factors that directly or indirectly influence the movement of the Bitcoin price. However, the following are the most prominent ones:
 

• Availability of Bitcoin: Individuals mine Bitcoins by adding and validating new blocks to the Bitcoin chain. These individuals are called Bitcoin miners. In return for their efforts, they are awarded some Bitcoins for every block they add or process. The miners’ reward is reduced by half for every 2,10,000 Bitcoins mined, which takes about four years. As there could be a maximum of 21 million Bitcoin in the network, and more and more individuals are seeking to purchase Bitcoin, the price has naturally increased due to high demand. 
• Governance and forks: Hard forks call for the Bitcoin miners and individuals involved in the validation process to follow a new set of rules and protocols, which adds to the Bitcoin price volatility. When this happens, some Bitcoin miners may not choose to follow the new protocols that have arisen due to the fork for various reasons. After a fork, the miners that still follow the old protocols would not be a part of the Bitcoin network, and their Bitcoins will then become a new currency. This has a direct impact on the pricing of Bitcoin. 
• Investor sentiments:Some individuals who buy Bitcoins do so with the view of transacting with them, just like a fiat currency, while the rest purchase them as an ‘investment’. The ones who put their money in Bitcoins do so to realise gains over time and exchange their Bitcoins into cash later. When the price rises, these individuals will start exchanging their Bitcoins for dollars, euros, or any other currency. When this happens, the Bitcoin price gets affected as a higher rate of exchange indicates speculation, which drives volatility. 

Should you invest in Bitcoins?

One thing to note before investing in Bitcoins is that there is no regulatory body to oversee the operations of Bitcoins. Also, Bitcoins are still not legal tender in India. It is advisable to not invest heavily in Bitcoin as there is uncertainty on whether the government would impose a total ban on Bitcoins and other cryptocurrencies. If you are to enjoy higher gains over time, you may invest in mutual funds and stocks.