What influences cryptocurrency prices?
What are the factors that affect the price of a given crypto asset? Are they any different from the factors that drive prices in traditional investments? We’re going to take a look at some of these factors and see which ones crossover from traditional investing and which are unique to decentralized digital currency.
From the outside looking in, it may appear that cryptocurrency prices are randomly volatile, going up and down without much rhyme or reason. While there is added volatility over traditional investments, they still follow many of the same rules and norms.
As an active digital currency trader, you’ll constantly be poring over cryptocurrency charts to try to make sense of these ups and down. Knowing why the graph is trending upwards or downwards can go a long way toward helping make you a successful investor.
Let’s take a look at some of these factors, and then see how they look through the lens of the crypto trading markets.
Supply and demand
One of the most elementary factors in any price is supply and demand. It’s likely the first concept you learned in the economics class: as the demand for something goes up, or the supply of something goes down, the price increases.
We see this in crypto markets with hard caps set at the number of tokens a certain cryptocurrency plans to release. These are usually staged over time, dependent on the rate of mining the currency or with planned releases by the company that created it.
Government regulatory changes
Just like with traditional investments, the regulatory climate in different countries can affect the value of your investment. With the novelty of bitcoin and the altcoins that came afterward, governments have struggled to put forth much in the way of meaningful regulation.
For this reason, the value of crypto assets can be more volatile in the face of regulatory change. For example, when China cracked down on bitcoin trading and shut down online exchanges, the price dropped dramatically. When the Japanese government recognized it as an official currency, the price shot up.
Watching the political climate surrounding your investment, especially in the country your chosen investments are held and traded in, are critical factors to consider.
Political changes or uncertainty
The state of politics in general can also swing the price of any investment. Interestingly, they tend to have the opposite effect on crypto and traditional investments. For instance, if traditional finances are facing a downturn or turmoil, people will tend to turn to decentralized options and the price of crypto is likely to rise.
This was demonstrated in 2015, when an economic crisis hit Greece. The BTC price rose as traditional assets were crashing. Much of that was driven by interest from Greek investors looking for an alternative after cashing out of the traditional market there.
South Korea is seen to have a large impact on crypto pricing, as it is a key player in crypto-trading markets. It’s the third largest country for volume in bitcoin trades behind the US and Japan, and early this year, calls for clamping down on the industry really dampened crypto prices worldwide.
Changes to bitcoin’s rules
While traditional investments are typically governed by a set of centralized regulations, most of the rules surrounding how bitcoins are traded and used are created by the coin’s developers. That means those rules can be changed at any time, and those changes can obviously affect the price.
Often most firms are looking to optimize their offering, but sometimes the changes can have the opposite effect and cause people to lose faith in a product. Conversely, a new rule might spark demand in a certain product.
One example of this phenomenon are bitcoin forks. As long as all users agree, new chains can be mined on a new fork, following different rules than the original. Typically, prior to the fork, the uncertainty causes prices to drop, but after the fork it usually continues to climb.
Failure to deliver on promises
Much like the Ponzi scheme in traditional investment, crypto investments can be affected by the failure to actually deliver what is promised. The price of a certain asset might skyrocket on the promise of some new feature – be it ultra-fast processing time, or a specific use case that solves a need – but then crash down when that promise isn’t fulfilled.
While this certainly happens in traditional finance, the concept of ‘vaporware’ is much more prevalent in the relatively new world of cryptocurrency. There are lots of people out there who talk a big game, but ultimately are looking to take advantage of neophyte investors.
The media and opinions
One area where the price of crypto is more deeply affected than traditional finance is by the press or by the opinions of experts. The traditional finance markets have a long history, and are somewhat impervious to opinion. On the other hand, the new markets created by digital currency are more susceptible to public opinion.
Often, the price of a digital currency can be swayed by an article published by an expert or a statement from a powerful government official or business leader. These swings often don’t last long, but the newness of the technology can cause short-term bumps.
Influence of different crypto prices
Changes in the price of one cryptocurrency can certainly affect the price of others. For example, when the price of bitcoin goes up, altcoins drop both in fiat value and in the value compared to BTC.
This can create a push-pull on the market that might not have existed without the influence of the other currency. It’s also a bit different than the traditional markets, where an increase in a certain company might mean an increase in other companies in that same sector.
Knowing what factors push the pricing of bitcoin and altcoins up and down is a key to successful investing. While many of the factors are the same as in traditional investments, there is an added volatility in the crypto trading market and some unique factors to stay aware of.
Either way, there’s no doubt that there are huge opportunities within the burgeoning industry. If you can understand the ‘why’ then you can weather the volatility and make the most of these opportunities.