Bitcoin, a digital currency, has been the source of much media scrutiny, generating both excitement and misunderstanding. It is, for many, a difficult concept to understand. According to its website, Bitcoin is "the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet." To oversimplify, it can be considered a way to pay for goods or services, just like a credit card, and it is primarily used on the Internet, though it is gaining some traction with brick-and-mortar stores and service providers. Bitcoin describes itself as "nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive Bitcoins with them." 

Bitcoins can be obtained several ways: receiving them as payment, purchasing them on an exchange, and through competitive mining. Of all the  ways to gather Bitcoins, buying them on an exchange is perhaps the most applicable to the average person. There are several US Bitcoin exchanges on which one can buy or sell Bitcoins. These set the price for this virtual currency. 

Price History

Created in 2009, Bitcoin has had very volatile price movements since 2013, as traders began to speculate on it.  

btc volatiility chart

Source: http://www.coindesk.com/price/

In addition to speculators, the price has been influenced by "breakages" in the technology, such as hackers bringing down exchanges and trouble with now defunct exchanges like Mt.Gox, which failed to properly account for all Bitcoins on its exchange. Despite these inauspicious activities, Bitcoin appears to have staying power. So what will drive the future price of Bitcoin to higher and sustainable levels?

Factors Influencing Price Movement

Bitcoin's price, like any currency, is determined by supply and demand. The demand side will be the most influential in increasing Bitcoin's price. In other words, mainstream adoption of Bitcoins will drive price movement. This can be accomplished by having more regulated exchanges for trading Bitcoins. Many of the early exchanges, such as Mt.Gox, had issues that negatively impacted the adoption of and the reputation of Bitcoin. However, regulated exchanges, like the opening of the Coinbase exchange, will help to ease concerns and should positively impact buying and increase its price. Additionally, price movement will be driven by the implementation of Bitcoin by companies as a viable payment option, much like the option of credit cards such as MasterCard (MA) and American Express (AXP) or payment systems like PayPal, and should spur demand for Bitcoins, driving up the price. Unfortunately, price movements will also be subject to speculation that can exaggerate price movements, causing prices to soar during price increases and to rapidly decline during price down turns.  

The Bottom Line

Bitcoin's price influencers are not dissimilar to factors that influence price movements of conventional currencies, like the US dollar or euro. However, there are fundamental differences in the currency itself such as low usage due to the newness of digital currencies, and widespread adoption is dependent on the acceptance by both web-based and brick-and-mortar companies. 

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