5 factors affecting cryptocurrency prices

When you start trading and investing in digital currencies, it won’t be long before you realize that cryptocurrency prices fluctuate regularly, and sometimes quite significantly. A $100 investment could be worth $200 or even $500 a day later, but it could just as easily be worth $30. That’s how quickly and how severely things can change in today’s industry.

Every cryptocurrency project, including giants like Bitcoin and Ethereum, is volatile and there are a number of different things that can cause their market values to rise and fall. In this AAG Academy guide, we’ll look at five of the biggest factors affecting cryptocurrency prices, which could help you determine what’s going to happen with your investments ahead of time.

Supply and demand of cryptocurrency

Cryptocurrencies are tradable assets, much like stocks, which means that one of the biggest factors that affect prices is supply and demand. A cryptocurrency coin or token is only worth something if there is demand for it, and that worth is determined by how much buyers are willing to pay for it. When demand outweighs supply, prices rise along with the market value.

One of the reasons Bitcoin is so valuable is because it is the best-known and most popular cryptocurrency on the planet, and therefore there is a huge demand for it. What’s more, Bitcoin, unlike most other cryptocurrencies, has a maximum supply of about 21 million. Around 19 million BTC are already in circulation, but once the limit is reached, no more will be minted.

This helps push up the price of the BTC that’s available. However, even when there is an infinite supply of a cryptocurrency, not all of it is available at once, and demand will often outweigh supply as a result. This means some buyers are willing to pay more than others to get their hands on it, and the market value of the cryptocurrency increases.

Sadly, for a large portion of cryptocurrencies, there is very little demand. This is often the case with newer projects that are yet to prove themselves have no obvious utility. In this instance, the number of tokens that are available outweighs the number of people who actually want to buy them, and therefore they end up being incredibly cheap — or completely worthless.

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Investors, media, and market sentiment

The hype and feeling surrounding a cryptocurrency, some of which is often referred to as market sentiment, also have a big impact on its value. News stories, social media posts, big moves made by certain investors, and lots more can all affect demand, and therefore cause a cryptocurrency’s prices and market value to move up and down.

For instance, positive news about a particular project, such as the announcement of a promising partnership with an industry giant, can often lead to a price increase as investors rush to get their hands on tokens ahead of what they hope will be an even bigger price rise. On the other hand, a well-known investor selling off certain assets can cause the price to fall.

Of course, it doesn’t always have to be sentiment around the cryptocurrency industry specifically. The state of the wider economy also plays a huge role in determining whether cryptocurrency prices will rise or fall, which is why we tend to see large drops and bear markets when there are economic struggles in major countries.

Competition between cryptocurrencies

Bitcoin and Ethereum may be the biggest and most valuable cryptocurrencies on the market, but they’re not the only ones. More than 12,000 projects exist today, and while a large percentage of those are a long way off from competing with the aforementioned industry giants, most of them are competing with each other. That, too, affects their value.

Most traders and investors don’t have unlimited funds that they can pump into every project that they deem interesting. So, when they flock to one particular cryptocurrency project because it is on the up, making promising moves, or simply endorsed by a high-profile individual, they will often sell the tokens they have from another project in the process. 

This has a knock-on effect for a large portion of the industry; while the price of one project is increasing as new users flood in, the price of others is falling as existing users move on. Not everyone will sell existing assets to invest in other projects, of course, but they may stop buying tokens from one particular project so that they can invest in another.

The maturity of cryptocurrency projects

Project maturity is another factor that impacts its value. New projects, regardless of how ambitious their roadmap may be, are unlikely to attract strong demand until they have proven they can deliver on at least some of their promises. Few projects actually become a success, so many investors, particularly those with experience, will steer clear of new projects.

Investors also tend to have less patience with newer projects. Even those that look promising enough to attract decent support don’t have long to deliver before investors begin looking elsewhere. More mature projects, which have already proven that they can fulfill the expectations of their supporters, are typically afforded more time to move forward.

This is one of the reasons why it is so difficult for new cryptocurrencies to stick around. Once investors have lost patience and start to flee, the value of the project falls quickly and its tokens end up being worth very little. It is then even more difficult for the project to progress because its creators don’t have the funds to do so.

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Industry regulation

Finally, the threat of regulation has long had an impact on the cryptocurrency industry. Large parts of it, with the exception of centralized exchanges, remain unregulated. But as more and more money is pumped into the industry, many countries around the world have stepped up their efforts to impose new rules and regulations that will govern how the industry operates.

With a total market capitalization of more than $1 trillion (that’s more than the GDP of most countries), the cryptocurrency industry has the potential to have significant macroeconomic consequences if it is mismanaged, some analysts have warned. Many nations are trying to ensure that doesn’t happen by bringing in regulations that will tighten cryptocurrency controls.

That’s yet to happen on a widespread basis, but if it does, it could completely change the cryptocurrency industry — which has long taken advantage of deregulation — as we know it. The threat of regulation alone is enough to cause cryptocurrency prices to fall from time to time, usually when a spate of new stories surrounding regulation hit the media.

References

• Cryptocurrency regulation global standard
• What affects cryptocurrency price
• What determines cryptocurrency prices