What Drives the Price of Cryptocurrency?
Over the last few years cryptocurrency has not only gained a lot of attention in the media, but also gaining more trust and curiosity from investors, banks, governments, and corporations. Even though it was initially met with cynicism, more and more investors and companies are moving toward the utilization of cryptocurrency.
Cryptocurrency is a digital currency in what seems to be more fitting for us in this digital age than your standard fiat. When compared to the longevity of fiat currencies, the 9 years that Bitcoin has been active seems like a blip on the radar. However, regardless of what your stance is on the cryptocurrency, the blockchain technology behind it is here to stay.
It’s also more likely than not that cryptocurrency has solidified its position as an international currency. It should not be taken lightly as an asset and will surely be around a lot longer than most have predicted.
One of the key characteristics of the cryptocurrency market is its volatility in price. Have you ever wondered why the price of cryptocurrency, whether it be Bitcoin or Ethereum, tend to fluctuate so much? Were here to explore those aspects of volatility and what drives market prices one way or another.
This aspect to volatility is easy to understand. Each time the government passes a law or publishes statements about how to regulate cryptocurrency, the price of the currency is bound to show an effect. For instance, heavy regulation tends to push people into selling their cryptocurrencies, thereby causing a downward pressure on the price.
It’s not necessarily that the new regulations are imposed on cryptocurrency specifically, but a general financial action by the government may also be translated into fluctuations.
An example of this is when Cyprus witnessed a banking crisis and discussion ensued on whether or not the country should start using Bitcoin as its currency.
There is an inherent anonymity behind cryptocurrency that has been a primary reason why the currency has garnered so much popularity. With this recent popularity, more and more governments are pushing to impose rules to end this anonymity and increase transparency as well as regulation. If this occurs, cryptocurrency prices are bound to be affected.
||User trust is an important factor in determining the price of any financial asset. By trust, we mean whether or not individuals believe that the given currency will be able to sustain its purchasing power in the future.
As an example….
Imagine that you invested in a Ethereum, but as the months pass you expect the value of your investment to likely decrease in the future. This could be due to media, government regulations, or a host of other factors. This will more than likely reduce the trust that you have with this currency.
So what do you do?
If you’re a new trader or investor the chances are high that you will likely sell. You take this action because you don’t trust in your shares of Ethereum to have the same value it currently holds.
If there are a lot more people like you who sell their investment today due to this news, they will also garner a “lack of trust” in Ethereum or even cryptocurrency as a whole. You will inherently be driving the price of the currency down, thereby playing an integral part in the currency’s inability to preserve its future purchasing power.
Trust is extremely valuable within the crypto sphere. Always remain calm and headstrong before you make any decision to sell, as more times than not, the market will change and the price of your now sold cryptocurrency will rise well above the price you purchased at. I like to think of this as “seller’s remorse”.
Trust was one of the reasons Bitcoin was able to rise to an all-time high back in December 2017 to 20k. Another major reason why cryptocurrency is valued at such a high price is due to the fact that it cannot be hacked. Also note that most Top 10 cryptocurrencies are expected to exponentially gain value over time. Many cryptocurrencies have 5X their value and more within a year, so think about that before you start panic selling.
Mass Adoption of Cryptocurrency
Cryptocurrency once had a humble beginning. While they are valued at a high price today, this was not always the case. What suddenly brought this onset of new found value? The rising demand and mass adoption of blockchain technology as well as viral like exposure within social media, news, media, as well as word of mouth.
It’s been gaining this momentum since its inception. This coupled with the fact that more technologically advanced countries like China, Japan, and South Korea are starting to utilize it within their everyday commerce.
More and more people every year start understanding why cryptocurrency is a beneficial investment and realize how much of a lucrative opportunity it is. As a result, the popularity of cryptocurrency, especially Bitcoin, has gone through the roof. The law of supply and demand dictates, when demand increases while the supply stays constant, the price increases.
Remember, almost all cryptocurrencies are available in a limited amount. When there is an increase in demand, it’s soon followed by mass adoption. While more investors enter the market, the price further increases. This trend is expected to continue as cryptocurrency is still a hot topic in most countries.
Speculators exist in every facet of the financial market, and cryptocurrency is no different. Speculation regarding the future value of a particular currency is derived from the news and other venues like social media and online forums.
For instance, if the liquidity of a particular cryptocurrency were to increase, speculators would deduce that more people are likely to buy. This would translate to an increase in prices. This speculation could have some investors purchasing cryptocurrency today in order to sell it tomorrow at a profit. This single action is what would drive the prices upward, thus creating a “ buying frenzy”.
On the other hand, news regarding how much more effective another cryptocurrency is when compared to say Bitcoin, can lead to a decrease in Bitcoin’s price before the newer currency hits the market.
Why? Speculation my friend, speculation.
Speculators will be expecting the new cryptocurrency to drive the price down and traders will begin selling their investment before its release in order to get a jumpstart on the market.
Speculators might be responsible for the initial decrease in prices, however the “trend followers” are the ones that cause it to exacerbate. Not everyone understands what they are doing. If everyone else is selling their investment, they would follow the trend and more than likely, do the same. This mentality is what governs a further decrease in price.
It’s hard for any financial asset to avoid price volatility caused by speculators. However, since cryptocurrency is largely unregulated and features high returns, the effects of speculators are felt much more prominently.
||As long as the stock market has been active, news and other media outlets have always played a major role in price fluctuations. This is also common place with cryptocurrency, however generally more pronounced.
News regarding crypto related bankruptcies, hacks on exchange websites, government regulations, delays in service, issues with crypto technologies, can cause an immediate disruption with any particular cryptocurrency.
Media influence can sometimes reflect a more negative “opinion” on some less notable media outlets which may release false information in order to decrease the value of a particular cryptocurrency. Negative news which is found to be primarily false is commonly referred to as FUD (Fear, Uncertainty, and Doubt). Be very careful when falling into this inevitable trap. Always do your own research (DYOR) and check other credible sources of news for comparison.
The Whale Effect
||If you’re not familiar with the term “whales”, you’re obviously very new to any form of trading or investing. That’s okay, you’re here to learn right?
The term is commonly referred to as an individual (or group like a corporation) who buys or sells large amounts of cryptocurrency, thus greatly influencing the trend of that particular market. These are also referred to as “market makers” and can be found within any trading marketplace (forex and stocks).
As you can imagine, these individuals maintain a lot of power within the market. Selling off a large amount of cryptocurrency, only to take advantage of other “panic sellers” selling off their digital asset. Then, when the time is right they buy back that currency at a lower rate. This is standard protocol for these whales.
There’s nothing that you can do to stop this from happening other than recognizing when it’s happening and riding the current trend in which these whales are dictating. Having a fundamental understanding with technical analysis can also help you spot these trends and take advantage of them before they happen.
||There are many factors that determine the price of cryptocurrency. The ones mentioned above are just the heavy influencers. Remember, not only does each factor on their own play a significant role in determining the price of a cryptocurrency, but two or more can wreak havoc.|
Just be careful that you’re not on the other side of these renegade dips and stay current with daily news. Following your invested cryptocurrency on Twitter can help you keep an up to the minute pulse on the latest developments.
Overall, most of the Top 10 cryptocurrencies located here will increase in price over time. This is true even after the weekly (or sometimes monthly) volatility in price is experienced. Understanding how these factors work will allow you to be in a much better position to realize when to buy or sell your digital asset. Understanding how the process works, along with personal experience, will give you an edge over all the other so-called “trend followers”.
Written by, CryptoCoinJunky.