Which Factors Contribute to the Change in the Price of Cryptocurrencies?
If you’ve looked into cryptocurrencies, you’ve undoubtedly seen the word “volatile” mentioned a couple of times.
Due to their decentralized nature and early status, digital assets are prone to price fluctuation. The fluctuation in the price of cryptocurrencies is a scary reality, especially for potential investors.
That said, these aspects can be looked into and even predicted with the proper know-how. There are all sorts of different elements that contribute to price volatility.
The use cases behind a project, government involvement, the media, and even the price of Bitcoin factor in.
Of course, it’s impossible to predict the price change with 100% accuracy. A lot of predictions are educated guesses rather than surefire changes.
However, knowledge of the following points will significantly affect how you approach crypto investments.
Supply and Demand
Depending on the cryptocurrency, there will be a limited supply of the security token. While real money can be printed with little effect, it would diminish the value for digital assets.
When it comes to cryptocurrency, there must be a cap on tokens otherwise they won’t have value. If the coins are harder to access, they will be worth more to attract investors.
Also, depending on the project, some tokens are high utility, further increasing their individual value.
In the case of Bitcoin, for example, more coins are only placed into circulation after hard work (mining).
Because work goes into releasing each token, their value has actual meaning. Once the 21 million cap of Bitcoin is hit, the cost may fluctuate higher as it is of limited supply.
Usage and Utility
Just like with work and Bitcoin, a cryptocurrency can only have value is backed by a strong use case. If there is no such use for a cryptocurrency, it will have no sort of value.
Sure, a project may rise due to speculation in its earlier stages, but you want an investment that will last. Once that speculation wanes and the project comes into existence, only then will you see the true value.
Real-life use cases that solve a global problem. Those are the tokens you need to look for. Bitcoin solves the problem of global payment processing.
Ripple resolves international conversion payments. Ethereum allows for decentralized applications.
These projects provide an incredible solution to a worldwide issue, which is why their tokens have so much value.
Cryptocurrencies are still very young, so it’s hard to tell which cases are the most successful in the long-run. However, it’s easy to predict which have the most potential, which is why they are taking off in this way.
The current lack of government regulation may seem like a good thing. However, an absence of structure prevents the general public from getting involved with digital assets.
People are okay with investing in stock opportunities because the government protects them. Investments are easy to make on platforms like NASDAQ, with the laws and regulations having been established decades ago.
Cryptocurrencies are a weird middle area with little government involvement. Due to their decentralized nature, it’s hard for precise regulation to be made.
Because of this, sometimes governments will make blanket statements, like entirely banning cryptocurrency trading.
While this seems ill-intentioned, it’s partly to protect citizens from something they don’t fully understand. Any regulation changes will have a significant effect on cryptocurrency prices.
Created in 2008 and available in 2009, Bitcoin is the first ever cryptocurrency. Long before we saw imitators on the same blockchain technology, Bitcoin was being used for online purchases.
Because of this, it has grown dramatically in value compared to the much younger tokens.
Also, because Bitcoin is used to convert to nearly every other currency, it’s price will affect the price of altcoins. If you see Bitcoin going up, altcoins will likely rise. If they go down, altcoin prices will probably fall.
An interesting point to note – as the price of Bitcoin rises, altcoins’ relation to fiat currency goes down.
This is because people would instead use the first digital currency to purchase altcoins over their fiat currency. It merely becomes a better deal to do so.
Cryptocurrency prices are incredibly volatile. If a big news outlet comments for or against a coin, the value will be affected. It’s similar to stocks, in a way. If bad press comes out against Tesla, the stock goes down, and vice versa.
This may not always have a major effect, however. Sometimes, we’ll see news of a country unbanning Bitcoin, and the price will hardly change. It’s important to keep track of hype to stay on top of your investments.
When it comes to altcoins, this factors in even more. The hype for an unreleased, yet promising altcoin is genuine. The media will talk all about the potential for these coins without noting how unrealistic it may be.
What if the project has no real roadmap? Is the team capable of their vision? What experience do they have? Note how the media reacts and invest accordingly.
All of this said, no media influence has been enough to establish or ruin a cryptocurrency. In fact, the negative news could even generate more hype around a token.
Some may see a story they disagree with and choose to put money into this newly discovered coin.
That’s not to mention the community surrounding a crypto asset. While the media is incredibly important, so are the participating parties. If a community is welcoming, we are more likely to see the positive word spread around.
The team should also be a big part of this. All of these groups will directly influence media coverage, so it’s best to induce positivity in the community.
Implementation of new ideas, like Bitcoin’s Lightning Network or Tron’s MainNet launch, will usually raise the value.
New updates mean that a tech fares better against its competitors. This will gather more investors and increase the value.
Conversely, a project’s value may fall if a direct competitor implements a new technology that pushes it above the rest. If Bitcoin implements a faster network, we may see Litecoin fall as a result.
These implementations could be massive or minor changes. Some may start the foundation for a long-term upgrade, while other advancements could be instant successes. Paying attention to both sizes will aid in investment practices.
Much like cryptocurrencies are used on a global scale, mining tokens is a worldwide operation. Somewhat recently, China banned all forms of cryptocurrency mining.
As a significant fraction of the overall global percentage, this hugely affected mining pools and the distribution of tokens.
The harder it is to mine, the more work it takes to verify transactions. This could increase value to a point, but if nobody can mine efficiently, that presents a more significant problem entirely.
Clearly, there is a wide variety of factors that influence crypto prices to varying degrees. As a widespread, global technology, cryptocurrency and blockchain have the potential to change the way we all work. It only makes sense that these early stages are a bit unstable.
That said, if you’re looking to get into cryptocurrency investments, it’s important to know as much as you can. These are volatile, independent entities that can fluctuate in the blink of an eye.
Some of them, like utility tokens, aren’t even meant to have a value associated.
The aspects listed above are arguably the most influential in fluctuating cryptocurrency prices. New technology, media influence, supply/demand, government involvement. They all affect the currency in various ways.
Much like with standard companies, the cryptocurrency market is hard to predict. You never know when a new Silicon Valley start-up will change the world with their new idea.
The same policy applies here. Learning to create a blockchain project is an entirely attainable goal in this day and age. It’s not unbelievable that a new idea will overtake an older one with no warning.
With cryptocurrencies in such an early stage, we’re likely to see many more factors come into play as time goes on. Sometimes, the market changes as quickly as 10% in one day.
While it’s impossible to attribute these fluctuations to any one thing, you can definitely pick out some key aspects. Hopefully, this list helps you with your investment choices.
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DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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