What Determines the Cryptocurrency Price?
Cryptocurrency is infamous for its erratic nature where the market can experience major upward and downward swings within hours. There are so many factors affecting cryptocurrency price that it’s nearly impossible to make price predictions.
Furthermore, cryptocurrency prices vary from one exchange to another depending on user demographic and location. Although many drivers and limiters can affect crypto prices, we believe there are 8 key factors that show a great correlation to prices.
Supply and Demand
Supply and demand is a simple economic factor that influences commodity prices. The less cryptocurrency in circulation, the higher the price will be. Bitcoin, at the time of publishing, costs $6,400 USD with a circulating supply of just over 17 million BTC. While Ripple, the third biggest cryptocurrency based on market cap, is only $0.28 USD with a huge circulating supply of 39 million XRP. People will pay more for the coins they think are more valuable.
Cryptocurrencies are generated through “mining,” a process in which transactions are validated and added onto a public ledger called the blockchain. Miners need to solve complex mathematical problems in order to validate transactions, but are rewarded with a unit of cryptocurrency afterwards for completing the validation. As more miners enter the network, the difficulty level of the problems increases too. Blockchains are difficult to manipulate and tamper with by nature, and the more secure a blockchain is, the harder it is to mine.
A great amount of energy is required to secure blockchains. In the most popular method of mining called of proof-of-work (PoW), where miners compete to solve complex math problems, electricity consumption is enormous. Bitcoin mining was estimated to have an annual energy consumption greater than the whole country of Ireland. This factor cannot be ignored when thinking about long-term crypto prices because high energy consumption also impacts the environment in a negative way.
A cryptocurrency’s usability gives it a lot of value, especially when it comes to its potential to replace fiat currencies. If a cryptocurrency can’t be used for anything, other than for pure speculation or to scam people, then it’s not valuable at all. Bitcoin has high utility because of its scalability. Its mining difficulty and electricity usage give it a high price which then can be used for investments. Ethereum was built with smart contract functionality and is used by thousands of tokens, giving Ether a higher price compared to all other alt coins.
News events also influence the price of cryptocurrencies. Whenever there’s news about some big financial firm partnering with a blockchain startup company, their cryptocurrency price goes up. Inevitably, when negative press comes out, price goes down too.
Of course, investors have a strong influence in the price of cryptocurrencies, especially for lesser known alt coins:
- They can buy huge portions of the crypto supply and then advocate it to push the price upwards.
- An investor investing a great amount in an unknown alt-coin can manipulate prices to his best interest.
- If more people invest in and talk about a cryptocurrency, outsiders may begin to speculate on the cryptocurrency as well, causing the price to climb higher.
Political and Legal Issues
Political uncertainty and legal moves by governments and regulators also affect the price of cryptocurrencies. Some countries accept cryptocurrencies as a legal tender, while others have banned the usage of all cryptocurrencies. As regulations become more clear, the number of transactions could decrease and be controlled by government. On the other hand, more users may enter the marketplace as a result of better regulations. Either way, the price of cryptocurrencies will be affected.
Due to political uncertainty on one hand and technological innovation on the other hand, cryptocurrency prices are extremely volatile. Therefore, always conduct thorough research prior to making any investment, and try to invest in coins that can last the next several years of market fluctuations. Because although volatility plagues the market in the short-term, price volatility will significantly decline in the long-term which should lead to higher prices in the future.
The value of a particular cryptocurrency can change in a matter of minutes because factors that drive the price of cryptocurrencies are diverse and change over time. As a result, cryptocurrency prices are extremely difficult to predict. Having said that, many enthusiasts, investors, and traders find this the most exciting part of the market as great potential rewards come alongside the risks they are taking.
Further reading: Why Some Cryptos Gain More Value Than Others