Whereas the simple economics of supply and demand play an important role, we look at several other factors that determine the prices of cryptocurrencies.
Millions of people are joining cryptocurrency investment plans, but there’s a lasting impression that the crypto trade is exciting but tricky. They have been a buzzword for over a decade now, and everyone knows that they can be wildly volatile – most news feeds carry news about the highs and lows of the crypto market. This article will discuss factors that affect the prices of cryptocurrencies.
How Price is Determined
There’s a big difference between cryptocurrencies and fiat currency. While fiat currencies are backed and controlled by governments and declared as legal tender, the value of cryptocurrencies derives from the fact that the parties involved trust their value.
Central banks and monetary reserves control money supply in the fiat currency system and thereby indirectly control inflation. On the other hand, cryptocurrencies are decentralized, meaning that any governmental authority doesn’t regulate them. While most countries haven’t yet accepted them as legal tender or even as a means of exchange, they still serve as a means of exchange, but they may not lose their value through inflation. The factors that determine the value of a cryptocurrency include the following:
1. A Coin’s Utility
One of the best ways a cryptocurrency gains value is by having an improved utility to become valuable within the blockchain environment and solve a problem. A good example is Ethereum; you can only do anything on the Ethereum blockchain by using Ether (ETH).
ETH is specifically designed and tailor-made for transactions on the Ethereum platform, meaning the demand on Ethereum platforms will determine its value. Today, ETH is primarily used as a form of payment for NFTs, while cons like BTC are used to pay for goods and services.
2. Demand and Supply
Like securities, stocks, commodities, and all other tradable assets, the price of cryptocurrencies is influenced by the basic principle of supply and demand. The price of a cryptocurrency will increase as the demand increases. For example, some cryptocurrencies such as Bitcoin are limited to 21 million coins; scarcity, in this case, plays a vital role in price fluctuation.
3. Adoption by the Masses
Like the demand and supply principle, a coin’s adoption plays a significant role in its price. The decision by El Salvador to make Bitcoin legal tender and PayPal and Wal-Mart to accept BTC as a means of exchange made the cryptocurrency valuable and had a significant impact on its price.
4. Market Capitalization
Market capitalization, which is determined by the total number of coins in circulation multiplied by the price of each coin, is an essential indicator of the value of a cryptocurrency. Economists believe that the market cap index is a better technique for indicating the actual price.
5. Interest-rate Fluctuations
Most markets will react any time a Central Bank adjusts the interest rates of fiat currencies. During those times, investors will retract from riskier investments and look for lower-risk ones to protect their yields. As a result, cryptocurrencies will almost always experience a price change based on the general interest rate fluctuations.
6. Notable Events
There’s an influence on price every time a specific or notable event involves a particular cryptocurrency. Some memorable events, such as media hype surrounding a cryptocurrency, usually significantly impact price and trading volumes because speculative traders will mostly want to avoid missing out on the potential of the event on the cryptocurrency. The same could happen when a coin gets listed on a prominent exchange or when a notable figure is associated with a coin.
Cryptocurrencies, which are just about entering teenage years, are still highly volatile, and wild price fluctuations will still be part of them for some time. Nonetheless, as governments, banks, and other tech institutions show interest in blockchain technology and cryptocurrencies, they still have a bright future. Even though cryptocurrency prices are affected by external factors, the key to successful cryptocurrency investment is to learn the fundamentals of every coin before you make your decision.
Tom is a freelance writer with over 10-years’ experience in content creation, blog writing, and SEO specializing in the blockchain and cryptocurrency niche. As a philosophical figurehead, he believes that to make our world a better place, we must invest in incorruptible products and procedures, of which Bitcoin and other cryptocurrencies are leading examples.