What Drives the Price of Cryptocurrency?

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Over the last few years cryptocurrency has not only gained a lot of attention in the media, but also 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.

This digital currency seems to be much more fitting for those of us living in the digital age as opposed to our antiquated fiat currency. When compared to the longevity of fiat, the 9 years that Bitcoin has been active seems like a blip on the radar. Regardless of what your stance is on the cryptocurrency, the blockchain technology behind it is here to stay.

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It’s also much more likely that cryptocurrency has solidified its position as an international currency over any other previous currency in history. 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 Bitcoin or Ethereum, tend to fluctuate so much? We’re here to explore those aspects of volatility and what drives market prices one way or another.

Government Regulations

This characteristic of volatility is easy to understand. Each time the government passes a law or publishes statements regarding how to regulate cryptocurrency, the price of the asset is bound to mirror an effect in price. For instance, heavy regulation tends to push people into selling their coins, thereby causing a downward pressure on the price.

Even new regulations that aren’t specific to cryptocurrency, but adhere to a general financial action by the government, may also be translated into fluctuations.

An example of this could be a financial crisis suffered on Wall Street which would inherently affect the crypto world as well. Whether it would positively or negatively impact the crypto market depends on many different variables

There is an inherent anonymity behind cryptocurrency. This has been the primary reason why the currency has garnered so much popularity. With recent popularity, more and more governments are pushing to impose rules to end anonymity and increase transparency as well as regulation. If this occurs, cryptocurrency prices are bound to be affected.

User Trust

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 currency will be able to sustain its purchasing power in the future.

As an example….

Imagine that you invested in Ethereum, but as the months pass you expect the value of your investment to likely decrease in the nearby future. This could be due to media, government regulations, or a host of other factors. These outside forces will more than likely reduce the trust you have with your particular currency.

So what do you do?

If you’re a new trader or investor the chances are high that you’ll likely sell. You might make this choice because you don’t trust that your shares of Ethereum will have the same value it currently holds in the future.

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 drive 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 sold cryptocurrency will rise well above the market price you purchased at. Many of us call this “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 due to the blockchain technology in which it operates on. However, be very aware that this still doesn’t mean that hackers won’t be able to hack an exchange and obtain access to your online wallet. Fortunately, most reputable crypto exchanges are insured against these types of scenarios. Most users are compensated for their losses.

Also note that most of the Top 10 cryptocurrencies are expected to exponentially gain value over time. Many newer cryptocurrencies have exponentially increased their value within a year, so keep that in mind before you start to panic sell.

Mass Adoption of Cryptocurrency

mass-adoption-of-cryptocurrency-bitoin

Cryptocurrency once had a humble beginning. While they are valued at a much higher price today than they were several years ago, this was not always the case. What brought this onset of new found value? The rising demand and mass adoption of blockchain technology has made a profound affect on the value of cryptocurrency. The viral exposure on social media, news, TV shows, movies, as well as word of mouth also inherently relay value to the digital coin.

Cryptocurrency has been gaining 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 begin to understand why cryptocurrency is such a beneficial investment. They realize how much of a lucrative opportunity it is and 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 will inevitably rise.

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.

Speculation

speculating-on-cryptocurrency

Speculators exist in every facet of the financial market, and cryptocurrency is no different. Speculation regarding the future value of any particular coin can be derived from the news or 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 a particular coin 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, compared to say Bitcoin, can lead to a decrease in Bitcoin’s price before the newer currency even hits the market.

Why? Speculation my friend, speculation.

Speculators will expect the new cryptocurrency to drive the price down. 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 herd” (trend followers) would cause it to exacerbate. Not everyone understands what they are doing. If everyone else is selling their investment, “the herd” will follow. This mentality is what governs a further decrease in price. This event can also be referred to as “panic selling”.

It’s hard for any financial asset to avoid price volatility caused by speculators. However, since cryptocurrency is largely unregulated and can inevitably deliver its investors high returns, the effects of speculators are felt much more prominently.

Media Influence

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 a common occurrence with cryptocurrency, however it can generally be more pronounced.

News regarding crypto related bankruptcies, hacks on crypto exchanges, 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 reputable media outlets. These FUD syndications 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 use sources 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 e.g. 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. These titans of the industry may sell a large amount of cryptocurrency, only to take advantage of other “panic sellers” who will inevitably liquidate their digital asset. Once the time is right, they’ll buy back that currency at a lower rate. This is standard protocol for these types of traders.

There’s nothing that you can do to stop this from happening other than recognizing when it’s happening and ride the trend which the whales are currently dictating. Having a fundamental understanding of technical analysis can also help you spot these trends and take advantage of them before they happen.

In Summary…

There are many factors that determine the price of cryptocurrency. The ones mentioned above are just a few of the main culprits. Remember, not only does each factor 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. Stay current with daily crypto news. Make sure to follow your cryptocurrency investment on Twitter in order to 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 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 this process works, along with personal experience, will give you a fundamental edge over the so called “herd”.

 

 

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