Cryptocurrencies are digital assets, and some ignorant users believe they should be worthless. This is a mistake because we are dealing with a traded asset, which means it has a price. Today we will explain how crypto price is determined, and what factors influence it. And also, you may checkout How to Store Cryptocurrency Assets.
Demand and Supply
The crypto market, like any other market, works according to the laws of economics. Demand and supply are the two pillars on which it stands. The relationship between these two and their ratio will consequently affect all price fluctuations. In a nutshell, the rule of supply and demand can be summarized as follows: the higher the demand, the greater the supply will be. This is a logical point because if customers want the product, the manufacturer will provide it in order to make a profit.
The rule of supply and demand also makes sense when determining how is crypto price determined. The higher the demand for a particular cryptocurrency, the higher its price will be. If there is an oversupply, the price will be lower, as the supply exceeds the demand. However, there is a small nuance: cryptocurrencies are limited to the maximum supply. This means that if a maximum of 21 million Bitcoins are claimed, you can’t get another 10 million somewhere else. Accordingly, because of the limited supply, demand will increase, so BTC is constantly climbing in price.
Liquidity and Trading Volume
Liquidity and trading volume are very important things when we talk about how is Bitcoin price determined. Volume is all the cryptocurrency that is currently trading on the market. The higher it is, the larger the price fluctuations we can see. The reason for the increase in volume is most often liquidity. If it increases, volume increases, and vice versa. If liquidity is quickly depleted (for example, if a large investor decides to sell the tokens they have quickly), the volume will quickly spiral upwards. As a consequence, the price will also collapse quickly.
To say that the higher the volume, the better, is not possible. In most cases, this does indicate increased investor interest, which will lead to a higher price, but there are exceptions. One of them is the rapid selling of digital currencies in anticipation of a decline in their price, which leads to bearish trading.
Market Exchanges and Price Detection
Crypto exchanges play an important role when it comes to what determines Bitcoin’s value. However, this is not only true for Bitcoin, but also for other digital currencies. For example, well-known cryptocurrencies like BTC and ETC are traded on all exchanges. New or not-so-popular tokens can only be found on some of them, which means that this will also affect the price. The greater the number of exchanges, the greater the demand, because cryptocurrencies are easier to buy, and vice versa. The most interesting crypto projects showed at Cryptodiffer, where you can find the one you are interested in.
Some crypto exchanges can manipulate prices. Techniques include:
- Pump and dump. It is an artificially created hype around a digital asset, based on a lot of selling and buying. This allows unscrupulous exchanges to deceive users into thinking that the price of the asset is rising.
- Wash trading. All stock exchanges publish capitalisation and trading volume information on their platforms. Unscrupulous exchanges may publish untrue information to induce users to buy or sell an asset.
- Manipulation of information. Some exchanges that use illegal methods are afraid to post misleading information on their platforms. In this case, they start rumours among traders’ communities and on forums.
To avoid falling into the trap, you should only trust reliable exchanges like Coinbase, Kraken or KuCoin.
The Sentiment of Investors and the Psychology of the Market
Of course, the trading sentiments of a single investor are not enough to have a significant impact on the market. However, if there are many such investors, it is quite feasible. How does a crypto coin gain value depending on the mood of the users? Let’s look back at one of the most prominent examples, namely Ilon Musk’s tweets about Dogecoin.
Elon Musk is a man who is trusted by many people, so his opinion means a lot. He was able to influence the mood of investors, which is why they started buying up the meme coin.
There is a specific Fear and Greed Index, which helps to understand current sentiments. For example, if a BTC is worth more today, most investors will try to sell it to avoid missing out, and vice versa. The index ranges from zero to one hundred, where zero represents maximum fear and one hundred represents maximum greed.
Mass Media Coverage and News
Do not underestimate the media who make reviews of existing crypto projects. They can influence the mood of investors. If a token gets positive reviews and a lot of talk about it, the investor understands that it will bring profit and therefore the price will grow. And vice versa: even if the project is good but the media and forums don’t talk about it, nobody will talk about it, which means the price won’t be able to grow. If digital currency developers are interested in making their tokens valuable, they cannot do without positive reviews and news in the media.
Other Economic Factors
Other factors can affect the rise and fall in the price of cryptocurrency:
- Fiat currency inflation. Since digital assets can be valued in fiat, the less it is worth, the higher the cryptocurrency rises.
- Regulation. This can either positively or negatively affect the price. Some investors fear the lack of regulation, while others, on the contrary, value freedom.
- Geopolitical events. They can also either raise or lower the price of digital currencies. At some moments, users will seek alternative methods of settlement, and at others, if the strictness of regulation increases, they will abandon them.
To Sum Up
We have listed the factors that can affect the rise and fall in the price of digital currencies. We hope this information will be useful to you. If you think there is something we haven’t mentioned, let us know in the comments!
