Have you ever thought What affects the rate of cryptocurrencies?
What affects the rate of cryptocurrencies? – The world of cryptocurrencies has grown massively. What started off as a simple digital means of payment with Bitcoin, has grown out into a full-fledge industry of its own which is thriving tremendously. Cryptocurrencies, and particularly blockchains, have revolutionized the financial sector. Today, there are a plethora of options of different cryptocurrencies to choose from and invest in. However, only a handful crypto-technologies manage to gain the attention of the crypto-community at large and not every crypto-coin or token manages to make it to the big leagues.
One aspect of the cryptocurrencies that has bothered many enthusiast is the highly-volatile nature of their value. Cryptocurrencies can have their prices increased or decreased massively within a matter of minutes. With the cryptocurrency industry exploding and maturing, the focus has swiftly shifted towards having the prices regularized so that cryptocurrencies can have more value in day-to-day dealings. So what exactly determine the price of a cryptocurrency? This article will be addressing exactly this topic so that the reader are well-aware of all the factors that affect the rate of a cryptocurrency.
All the factors come down to the fact that whether they come as a positive or a negative development for the cryptocurrency. The development sets the market sentiments which in turn affect how people trade with the cryptocurrency.
Crypto Supply and Demand
As is the case with every asset or commodity, the supply and demand factor is the foremost thing that sets the price of the cryptocurrency. The supply and demand factor is an economic factor that describes how cryptocurrencies, or any other asset for that matter, change their value based on the mismatch of availability of suppliers and buyers. The higher the demand of a cryptocurrency, the higher will be its price as there will be more buyers who will be willing to pay more. On the other hand, if the buying rate is less and there are more suppliers wanting to sell their holdings, they will be forced to drop their prices to make a deal. Therefore, lower demand results in a decrease in the value of the cryptocurrency.
Unlike traditional fiat currencies that can be printed, cryptocurrencies operate in a different way. Usually, they have a capped supply which means there is an absolute limit to how many tokens there ever will be. Also, the rate of release of new coins into the market tend to decrease over time, which means that the value of a cryptocurrency will increase gradually.
The demand for a specific cryptocurrency can vary greatly, and this in turn in influenced by a number of other factors which include partnerships, availability, use-case and technological worth of the cryptocurrency.
Regulation on cryptocurrency
With the cryptocurrency craze taking over the world, the law and regulatory agencies are becoming active to keep up with the development and use of cryptocurrencies. Different countries have adopted different stances over the use of cryptocurrencies, where some have recognized them as units of currency, some have tightly regulated them while some have made them illegal altogether.
The price of a cryptocurrency tend to react very quickly to any such decision that affect the crypto-market at a large scale. For example, the price of Bitcoin increased drastically when Japan announced that it was legalizing Bitcoin in 2017. The opposite happened after China launched a crackdown against cryptocurrencies and blocked all Bitcoin trading. Such decisions on a country wide scale have large impacts on the crypto-markets which create an imbalance in demand and supply and therefore affects the price of the cryptocurrency.
Cryptocurrencies are often based on energy intensive consensus models like Proof of Work. Coins like Bitcoin are mined by crypto-miners through specialized devices which generate a high computational power. For this reason, they consume a lot of energy and add to the extraction cost of the crypto-coin. This initial difficulty to mine cryptocurrency then affects the price of the cryptocurrency.
Speculation and Social Media
Speculation, anticipation and sentiment building is a weapon in the cryptocurrency space. Setting the mood of the crypto-market right is essential for every cryptocurrency in order for it to score big on the crypto-charts. Speculations can push the price of a cryptocurrency and can deflate it as well. All of it occurs artificially, as large investors manipulate the sentiments of the general market and succeed in shifting the interest of the traders to either buy or sell.
Media is the main tool that is used to set this in motion. Sentiment building starts from social media and spreads like wild-fire. Good news increases the price of a cryptocurrency while bad news creates panic, which leads to a drop in the crypto-market. A recent example of Bitcoin and Dogecoin soaring high after Elon Musk’s tweet, shows how far the market mood can be set and prices can be impacted.
Cryptocurrencies vs. traditional economic
Cryptocurrencies are not based on traditional economic models and are therefore not linked with gold or any other commodity like oil. Cryptocurrencies are considered as a decentralized technology which means that it does not depend on the value of any other commodity. A type of cryptocurrency known as stablecoins are something that have their value backed by real-world assets and fiat currencies like US Dollar. But even than that doesn’t mean they are controlled by the fiat-currencies.
The crypto-industry has grown in to a massive industry of its own. Interestingly, it is not affected by many industries itself while it is disrupting many other industries through its progress. The two main industries which are majorly linked with the crypto-industry is the banking industry and the IT industry. The progress and development in the IT industry enables progress and ground breaking advancements in the crypto-industry and vice versa. The banking industry, on the other hand, is showing resistant to cryptocurrencies, because if cryptocurrency become a norm, the traditional banks will have to shut down. Also, regulations and law enforcement is compulsory in the banking sector, which cryptocurrency technologies tend to defy.
The conclusion of: What affects the rate cryptocurrencies?
Did we become clever on What affects the rate of cryptocurrencies? I hope you did, but there are more factors which definitely affect the price of the cryptocurrencies at large. The whole crypto-scene is not as straightforward as it seems to be and can at times become very complex to understand as to what is driving the prices of the cryptocurrencies. However, the most apparent and visible factors are the ones mentioned above.