In this blog, we will talk about some of the main factors that influence the price of cryptocurrencies. After reading this blog you will have a better understanding of how the market fluctuates and you can also begin your trading journey on Bybit.
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What Influences the Market Price of Cryptocurrencies?
Cryptocurrencies have been around for over a decade now, but their popularity has increased immensely in the past couple of years. A lot of people are now investing in cryptocurrencies because the crypto market is booming, and many experts are calling it the future of finance.
However, where cryptocurrencies show a lot of potential as an investment it is still not for everyone. The cryptocurrency market is highly volatile and requires a lot of patience. Unlike the stock market, you can see fluctuations as high as 45% on either side. Unfortunately, many people who invest in cryptocurrencies are oblivious of how these fluctuations work. This lack of understanding is one of the main reasons why many people lose money in the crypto space.
That is why it is crucial for any investor to have a good understanding of how the cryptocurrency market works and what influences the price of a particular cryptocurrency. Investors can navigate their way through the market successfully only if they are aware of the factors that make the price tick.
Let’s take a look at some of the main factors that influence the market price of cryptocurrencies:
Demand and Supply
One of the major factors that send the price of a particular cryptocurrency higher or lower is its demand and supply. The math here is simple! If the demand is high and the supply is low the price of that currency will automatically increase. Similarly, if a cryptocurrency has a huge supply but the demand is comparatively low, the price will decline.
One of the main things that set cryptocurrencies apart from traditional currencies is that they have a finite supply. Fiduciary currencies have no limits, and the government can always print more money which causes inflation. For a cryptocurrency, the number of crypto tokens in circulation is finite. Over time, when the demand for that crypto increases its value also increases.
Every cryptocurrency has a different total supply and could range between a few thousand to billions. This is something that also depends on several different factors associated with that currency. However, the formula of demand and supply still applies to all cryptocurrencies.
Rules and Regulations
One of the main appeals of the blockchain technology is that it requires no third-party involvement and is not controlled by financial institutions. However, that is not entirely true because the government always gets involved. Governments around the world are actively trying to regulate and control the crypto space as much as they can.
Most reputable exchanges in the market have to follow these rules and regulations in order to comply. That is why whenever there is a new rule or regulation the price of cryptocurrencies fluctuates.
If the new rule is in favor of the market, we naturally see a spike in price. If it is the opposite a sell-off is always on the cards and the price drops. That is why one must keep themselves up to date with their national authorities and the efforts they are making to regulate cryptocurrencies.
Cost of Mining
A lot of cryptocurrencies out there follow the proof-of-work model which requires the transaction to be verified by miners. In order to verify these transactions, a miner needs to solve complex math problems which require a lot of computational power. Miners invest in mining rigs and electricity to validate these transactions. In return, they are rewarded with the same cryptocurrency for their efforts.
The more miners there are out there for a particular cryptocurrency the harder it is to mine. Crypto rewards also decrease over time and if the price of that particular crypto is not high enough, it would not motivate miners to put all that effort and resources into the process. Therefore, higher mining costs increase the cost of the cryptocurrency as well.
However, miners are essential for a proof-of-work model cryptocurrency and as long as there is demand for blockchain they will keep thriving.
Popular cryptocurrencies like Bitcoin and Ethereum are listed on almost all of the cryptocurrency exchanges out there. Most exchanges prefer to list popular cryptocurrencies as they are in demand and attract more customers.
On the other hand, if you are looking for crypto projects that have comparatively smaller market caps, you would only be able to find them on selective exchanges. This affects the price of a cryptocurrency a lot! If the tokens are only available on selective exchanges, it means that the public access to them is already limited. The more exchanges a cryptocurrency project is listed on the more exposure it gets.
Also, some of these less popular cryptocurrencies are just getting started and are getting listed on exchanges gradually. For such cryptocurrencies, we can see a significant change in price when they are listed on a new platform. There are many cryptocurrencies out there that saw a significant spike in price when they were first listed on a big exchange like Binance or Coinbase.
News and Media
Another main factor that affects the price of a cryptocurrency greatly is news and media. If a cryptocurrency is being portrayed in a positive light and everyone is talking about it on social media, then you will see it go up every day.
One example of this is the SafeMoon project, which really does not offer anything special but has been a hot topic in the news, and everyone on social media is talking about it. The coin was so hyped on social media platforms that it eventually blew up and everyone started to buy it.
This is something that does not happen to every cryptocurrency, but it clearly shows that how volatile the market is.
Good or bad news also affects the price of a cryptocurrency. It is better to keep track of the projects on media that you are invested in.
These are some of the main factors that affect the price of a cryptocurrency. Apart from these, there are some other small factors as well that can influence the price of a particular cryptocurrency. It mostly varies from project to project but one must be aware of all the potential factors that can affect the price.
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