Obviously the number of existing Bitcoins affects the value, but what else? What are some of the primary factors for a rise or fall in a Bitcoin's worth?
The price for a bitcoin, e.g. for trading with other currencies, derives as usual from the interaction of supply and demand.
The supply of bitcoins increases over time, as determined by the rules in the software which is run by the majority of miners, and increases regularly over time, in decreasing increments. It can also decrease when people lose access to the private keys which are needed to spend bitcoins.
The demand is driven by a variety of factors:
Bitcoin's utility as a flexible medium of exchange, with low transaction costs, efficient micropayments, little effective regulation, ease of becoming a merchant, pseudonymous accounts, and a worldwide market.
Impediments to the bitcoin economy caused by the friction and inconvenience of using bitcoins due to idiosyncratic software, difficulties obtaining bitcoins, relative lack of people who have bitcoins to spend, the risks of a new experimental currency, lack of understanding, etc.
Demand from new users, derived from recent publicity or new uses.
Speculation as to the future of bitcoins as an investment, over the long-term as well as the short term
Competition from related transactional or investment options such as Paypal, gold, etc.
Update Note that as long at the overall exchange market is relatively small, the market price can be manipulated by sufficiently well-funded investors who can expand the supply of available bitcoins, or increase demand, to meet their own goals.
See also the question and answers at What economics/finance methods and tools can be used to analyze and predict the Bitcoin market?. (Previously I linked to this, which is now deleted: What technical indicators might be appropriate for analyzing Bitcoin currency trading? - Personal Finance and Money - Stack Exchange)
The exchange rate is affected by people's confidence in the system.
Another compounding factor is that new Bitcoins are generated every few minutes, some of which are being dumped on the market. If people are not buying these up, or saving them - then the exchange rate will go down.
Another factor is the news. Not only does it affect confidence, but many people who would invest in Bitcoins don't know about them yet.
Following the Fisherine quantity of money...
Applying the thoughts of the Fisherine quantity theory of money to BTC could be a possible answer:
- P = Fair value of a BTC (denoted in a foreign currency)
- Y = Volume of trade (denoted in a foreign currency) -> Goods and Services bought!
- V = Velocity of BTC
- M = Quantity of BTC
P = Y/(V*M) -> e.g.: USD 5/BTC= USD 5'000'000/ (1*1'000'000)
Or following Hazlitt & Mises...
The detractors of the Fisherine theory claim that changes in the price level are independent of the money supply but dependent of changes in people's relative valuations of money and goods causing a higher/ lower volume of trade which results in changes of V (http://mises.org/daily/2916).
Combining this statement with the fact that flexible prices prevent the possibility of arbitrage one could state that there is no fundamental or objective high or low value of BTC in comparison to other currencies. This leads to the assumption that people holding BTC, which are Buyers of G&S and regular Speculators** , have to value the worth of their wallet relative to the exchange rate for which they bought their BTC (and their trust in the future development of the exchange rate), deciding to buy goods and services or exchanging their BTC against foreign currencies, which both ends up in a increased supply of BTC** and furthermore seems highly subjective and unpredictable.
** In addition one has to think about which incentives different individuals face exchanging their BTCs into foreign currencies: Suppliers of goods and services should have nearly no incentive holding BTC regarding the risk of exchange rates - They simply use BTC as a mean of exchange using their own (foreign) currency for storing value. Buyers of Goods and Services, given the amount of BTC they are holding is spread among a greater number of individuals (a smaller amount of BTC per head in comparison to suppliers), do not face such substantial risk and therefore have less incentives exchanging their BTC into foreign currencies, in fact there seem to be several reasons for Buyers to hold BTC. Just as Suppliers Miners should also face an incentive exchanging their BTCs, due to their costs of mining which are also denoted in a foreign currency. Regular Speculators/ Investors should react countercyclical: Buying BTC at low prices, selling them at high prices.