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With cryptocurrency’s rapidly growing importance on the market, it is only natural to wonder what makes its value fluctuate. Highly-coveted cryptocurrencies, such as Bitcoin, can vary in value drastically over a time span as short as one day.
This change in value is ultimately dependent on a variety of factors.
The value of cryptocurrency is most directly impacted by basic supply and demand. Most cryptocurrencies have a fixed supply, meaning that the price will go up as demand increases. Other factors that can impact the value include competition between different forms of cryptocurrency, trader actions, global media attention, and trade market integration.
Cryptocurrency may seem like an increasingly difficult concept to track and understand, but it doesn’t have to be. Keep reading for a simple breakdown of the factors that impact the changing price of cryptocurrency in the current economy.
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What Impacts The Value of Cryptocurrency?
Cryptocurrency is well-known for its surging popularity and often very large price tags. Although it may seem like the price of crypto is arbitrary, there are a complex number of factors that impact its value.
Supply and Demand
Most people have heard of the economic concept of supply and demand. This term means that when something is in high supply but low demand, the price will go down.
Conversely, prices will surge when there is a limited supply but high demand. Many cryptocurrencies, such as Bitcoin, have a fixed supply. To best combat inflation, these types of cryptocurrencies will destroy or “burn” tokens when the number of existing tokens grows too high.
When these tokens are destroyed, they are sent to an irretrievable blockchain address and effectively taken out of circulation. As the demand for cryptocurrency increases, supply has still largely remained stable.
This means that the price has gone up significantly in recent years for most types of crypto.
Competition Between Currencies
While some cryptocurrencies are more popular on the mainstream market than others, there are a large number of different cryptocurrencies. Some of the most popular types include:
With the surging number of new cryptocurrencies out on the market, there is more competition, which can, in turn, impact prices.
For example, if a specific type of cryptocurrency wants to attract more customers initially, they may set their prices low. As their popularity grows, other cryptocurrencies may need to alter their prices to better compete.
People who actively trade cryptocurrency can have a big impact on day-to-day prices. Traders may choose to buy, sell, or hold cryptocurrency following current market conditions.
Their actions in a given day or amount of time can impact the prices across different types of cryptocurrencies for other major traders and middle traders alike.
Costs Associated With Production
Cryptocurrency is notoriously “mined,” which means people use computers to determine what the next block is on the blockchain, and each block is considered a new unit of currency.
This complicated process often requires highly-specialized equipment and considerable time investments. However, it is also a necessary process because it allows more cryptocurrency to enter the market.
For this reason, the cost of production is often factored into the price of cryptocurrency. Competition for finding the next block is on the rise, too, meaning that the technological costs associated with crypto mining will continue to increase.
Although this seems intuitive, it is undeniable that a global attitude toward cryptocurrency has a significant impact on how it is valued. As more people begin to see cryptocurrency as a legitimate form of investment, its demand goes up accordingly.
Coverage by the following can increase global interest in cryptocurrency:
- News coverage
- Use by trusted or popular figures
- Word-of-mouth information or cultural spreading
As with anything, cryptocurrency’s value will depend on how much people want to buy it. If no attention or credibility were given to cryptocurrency, the prices would plummet.
However, more and more people are interested in investing in this type of currency.
Trade Market Integration
In keeping with the above reason, the more that cryptocurrency is integrated into the trade market, the more credibility and interest generated.
For example, recent popular platforms such as PayPal have begun offering options for cryptocurrency. As people see many legitimate companies alter their software and services to fit this growing form of currency, they may be more interested in investing.
How Will I Know if My Cryptocurrency Investment Will Go Up or Down?
If you have invested in cryptocurrency, your next question may be to wonder how you can make sense of these fluctuations to know when the best time is to sell.
In general, you should consider the following factors:
- New software updates: Releases in software can drive the price and demand up.
- Increasing competition: If there is a new cryptocurrency on the rise, the other prices of cryptocurrencies may go down temporarily.
- Trading patterns: Keep an eye on general trading patterns to see if you can ascertain when cryptocurrency has the highest value over a day, a month, or even a year.
Knowing when to sell your cryptocurrency will require a consideration of many factors and some investment of time and research.
If you are new to cryptocurrency, you probably have a lot of questions about this new form of currency and what the hype is all about. Cryptocurrency is growing rapidly more popular, and its large fluctuations in value might seem a little baffling at first.
Cryptocurrency is ultimately impacted by a variety of factors. However, like most other goods, it is most directly impacted by the economic principle of supply and demand.
Within the parameters of supply and demand, there are many things, such as the cost of production, competition, and trading actions, that can cause the supply and demand to fluctuate.
If you are an investor in cryptocurrency, keep a close watch on value trends and know the reasons behind a change in value. This will increase the likelihood of making a profit off your crypto very soon.