Today, the cryptocurrency market has thousands of different digital assets. Of course, the most popular ones and those with the biggest crypto market capitalization are Bitcoin (BTC) and Ethereum (ETH), the main crypto stars whose pioneer blockchain technology paved the way for other cryptos. These two currencies are a synonym for crypto assets, with their prices dramatically rising since 2020. However, there are also numerous altcoins that have high trading volume and market caps such as Bitcoin Cash (BCH), Ripple (XRP), Litecoin (LTC), and others.
Each cryptocurrency has its own market dynamics, ways of use, and ecosystem. Some coins and tokens are part of a smaller project, built on an existing blockchain (like ERC20 tokens), and some cryptos like Bitcoin have their own massive blockchain networks and are used around the world as an innovative, fast, and secure payment method.
At a first glance, it really isn’t clear what are the determinants of the price of a certain cryptocurrency, especially because of the market’s high volatility. You can easily get the impression that the prices fluctuate without any order, but actually, there are numerous factors that determine the price of every crypto asset. Let’s take a look at these factors in order to better understand how the price of a cryptocurrency rises and falls.
Factors That Influence the Price of Cryptocurrencies
One of the first things you need to know about the cryptocurrency market is that it is highly volatile, with prices jumping and dropping all the time. Investing funds in cryptocurrencies can pose a high risk for your money if you don’t study the factors that influence the rise and fall of prices in the crypto world. However, it’s a common mistake to think that the prices of cryptocurrencies are totally out of control and that there are no factors that determine their actual prices, besides random changes on the market.
These are some of the main determinants that shape the prices of cryptocurrencies.
Fluctuation of Supply and Demand
Supply and demand is a very important factor that determines the price of crypto. Digital currencies mostly have a predetermined or limited supply of coins. This is the case with the most popular currencies such as BTC and ETH. For example, Bitcoin has a predetermined supply of 21 million coins that can be mined. This amount isn’t yet in circulation since miners all over the world have yet to mine this sum, but the blockchain itself is capped at 21 million units. The situation is similar with many other altcoins, and it is a general practice of developer teams to make a currency harder to mine over time in order to make it scarce so that it can retain value. You can check the circulating supply of every crypto on the market on market cap sites such as CoinMarketCap.
The total amount of a certain currency that is present on the market is generally only replenished by new coins in order to restore the number of lost units during transfers and network fees. The supply and demand ratio of each crypto is a huge factor when determining a price of a currency. When the demand for certain crypto goes up and the supply remains the same, the value of the asset will also rise, increasing its price. Likewise, if the demand for a coin starts to fall, the price will also decrease. The price of Bitcoin is surely going up when demand rises, and it has been rising for years now.
The following factors can be regarded as some of the determinants that can influence the demand for a coin.
Mass Adoption of a Crypto Like Bitcoin
Mass adoption is a key indicator of the popularity of a cryptocurrency and it directly influences the price of an asset. When a crypto reaches mass adoption and starts being used by millions of people worldwide for payments, exchanges, and transfer of funds, the value of the crypto is sure to rise at one point. If a cryptocurrency is trusted and so widely used that even financial institutions and companies such as PayPal start to accept it, like in the case of Bitcoin, the price of the coin will go up.
BTC is of course the most dramatic example. The Bitcoin trading volume and market cap that are exponentially increasing are encouraging more and more banks to become crypto-friendly and include Bitcoin-related transfers in their portfolio of services.
A similar thing is happening with Ethereum, which is also becoming massively adopted as a fast and practical financial tool for payment, transfers, and the powering of smart contracts and decentralized applications by developer teams and startups from different industries.
Inflation of Fiat Currencies
Inflation of real world currencies is a factor that can influence the price of cryptos like BTC. For instance, if the U.S. dollar (USD) falls, then the value of Bitcoin will immediately increase in regard to USD, making BTC more valuable on financial markets, since you can now exchange your bitcoins for more dollars and cash out to gain a profit.
Easy Public Access to Cryptos
Cryptocurrencies are easily accessible to the public all over the world. All you have to do is open a crypto wallet, an exchange platform account, load it with cash, and start buying cryptos. Digital currencies are well established nowadays as a new form of financial assets that can be used far more efficiently than traditional fiat money. For this reason, the market cap of popular cryptos is steadily increasing, along with their price. Many people also trust cryptos more than fiat currencies because of the deflationary nature of these assets which makes them a good method for storing funds safely, unlike fiat money which is subject to possible inflations.
Pumping and Dumping
Pumping and dumping can directly influence the price of a certain crypto asset. The price of a crypto can be manipulated to some extent by concentrated efforts of third parties. The tactic of pumping and dumping refers to creating a crypto bubble of value by placing large numbers of orders for a certain asset on cryptocurrency exchanges, like ETH, driving its price up, and then dumping the price of the coin by cashing out large sums of ETH in a short period of time. This is a method used by teams of brokers and developers in order to manipulate the pricing of crypto. Exchange platforms know about this behavior but they don’t really have a method for preventing it.
Media Coverage and Community Support
The great power of the media is undeniable. It can not only form public opinion about a topic, but also influence the prices on the stock market, or in this case, the price of cryptocurrencies. Widespread media coverage, especially social media with an affirmative tone about a certain crypto popularizes the currency and creates a positive attitude towards the asset, which in turn can influence its price and send it on an upwards path.
Additionally, community support, which is closely connected with public opinion formed by the media and the qualities of a certain crypto, can also influence the price of an asset. When you have a loyal and constantly increasing crypto community that supports Bitcoin or Ethereum, you can bet that the price of these currencies isn’t going to suddenly crash.
A Few Words Before You Go…
Even when you take all these factors into account, you still can’t be sure about the price fluctuations of a certain crypto: whether it will stay stable for a longer period of time or it will experience some sudden ups and downs. Still, you can definitely learn to explain and understand the change of cryptocurrency value when you grow aware of these determinants.