When it comes to cryptocurrency, everyone is curious about one thing – the price. Why does Bitcoin cost so much? What factors affect cryptocurrency price and value?
Your returns could be massively affected by understanding what matters and what doesn’t.
In this article, we will explore exactly that. We will discuss different factors that can impact the price of a particular cryptocurrency. By understanding these factors, you will be better positioned to make investment decisions and understand why prices fluctuate.
What is Cryptocurrency?
Before diving into the factors that affect cryptocurrency value, let’s first define cryptocurrency. Cryptocurrency is a digital or virtual currency or asset that uses cryptography for security (the underlying pipes are handled through blockchain technology).
Cryptocurrencies are decentralized, which means they are not subject to government or financial institution control. Bitcoin, Litecoin, Ethereum, and Monero are all examples of cryptocurrencies.
Now that we have a basic understanding of cryptocurrency, let’s move on to the factors affecting its value.
Supply and Demand
The most crucial factor that affects cryptocurrency values is supply and demand. The price will go up when there is more demand for a coin than the available supply. Alternatively, the price will go down when there is more supply than demand. These are basic economic principles at work.
How does this happen in the cryptocurrency world? When there is news of a new coin or project, investors will buy that coin in hopes of future price appreciation. This increased demand can lead to a price increase. Alternatively, investors may sell their holdings if there is negative news about a coin, leading to decreased demand and prices.
The money supply of a given virtual currency is also determined in the protocol; for example, there can only ever be 21 million Bitcoins. Bitcoin mining becomes less and less profitable as time goes on because the money supply is fixed, and miners are rewarded with fewer and fewer coins each time a block is mined. So, as the demand for Bitcoin grows, there will be upward pressure on prices.
Conversely, Ethereum’s money supply is limitless; new ETH can be created each time a block is mined. So, as Ethereum becomes more popular and demand for it grows, there won’t necessarily be upward pressure on prices since new ETH will continually be created.
Another way that supply and demand affect prices are through mining. Cryptocurrency mining is how new coins are created. Miners are rewarded with coins for verifying transactions on the blockchain. As more miners enter the market, the difficulty of mining increases, which leads to less reward per miner. To offset this decrease in reward, miners will sell some of their newly minted coins, leading to increased supply and lower prices.
Another critical factor that affects cryptocurrency value is transaction activity. When more people use a coin to buy goods and services or to transfer money, the price of that coin will go up. This happens because increased usage indicates more real-world utility for the coin. In contrast, when transaction activity decreases, the coin price usually falls.
Another factor that can affect cryptocurrency value is media hype. When a coin or project receives a lot of media attention, it can lead to an influx of new investors and higher prices. However, the opposite is also true – if there is negative media coverage, it could lead to decreased demand and prices.
An example of this is Bitcoin’s price increase in late 2017. Bitcoin received a lot of media attention due to its rapid price appreciation. This led to more people buying Bitcoin, leading to even higher prices.
A hard fork is a change to the protocol of a blockchain that creates two different versions of the blockchain. This can lead to increased demand for one version of the blockchain over the other, which can lead to higher prices for the preferred version.
An example of this is the Ethereum hard fork that led to two different versions of Ethereum – ETH and ETC. Most people preferred ETH, leading to increased demand and higher prices.
Another is Bitcoin Cash; when Bitcoin was hard forked in 2017, some people preferred the new version of Bitcoin, which led to increased demand and higher prices for Cash.
Investor sentiment is another crucial factor affecting cryptocurrency prices. In general, when investor sentiment is positive, prices will go up. When sentiment is negative, prices will go down. Investors buy or sell based on their perception of the market. If they believe that prices will go up in the future, they are more likely to buy. Alternatively, if cryptocurrency investors believe prices will go down, they are more likely to sell.
When a country or region announces regulations related to cryptocurrency, it can have an impact on prices. For example, in 2017, China issued a blanket ban on ICOs, which caused the price of Bitcoin to drop significantly. In contrast, when South Korea announced it would regulate and legitimize cryptocurrency exchanges, Bitcoin’s price surged.
The total number of active nodes on a blockchain also impacts prices. Nodes are the active wallets (or computers) connected to the network and help verify transactions. The more nodes there are, the more secure the network is. When node count goes up, so does the price. This is because investors view it as a positive sign for the long-term prospects of a given coin or project.
Several nodes also suggest a strong community; the camaraderie of its users often determines success in the crypto market.
How To Use These Factors to Make Money With Cryptocurrency
Now that we’ve discussed some factors that affect cryptocurrency value, let’s talk about how you can use this information to make money.
Keeping Up With Crypto News
The first thing you need to do is stay up to date on the latest news. This means reading articles, following influencers on social media, and subscribing to newsletters. By doing this, you will be able to identify when a coin is about to receive a lot of attention and potentially increase in price.
Here are some suggestions to get you started:
- Bitcoin Magazine
- @VitalikButerin (Ethereum co-founder)
- @SatoshiLite (Litecoin creator)
- @NickSzabo42 (Bitcoin, Ethereum, and smart contract pioneer)
- The Block crypto newsletter by Mike Dudas
- Off The Chain by Anthony Pompliano
Use Information From Cryptocurrency Exchanges
Exchanges offer a wealth of information about investor sentiment, price movements, and more. By paying attention to this data, you can gain valuable insights that will help you make money with cryptocurrency.
Here are a few things to look for:
- Buy and sell walls
- Order books
- Trade history
- Charting tools
- Total market capitalization
Turn Knowledge Into Profit In the Cryptocurrency Market Today
Crypto markets can seem intimidating, but they don’t have to be. Understanding the factors that affect cryptocurrency value enables you to make informed decisions and profit from market movements. Here are the factors that can affect the value of your cryptocurrency investment:
- Money supply and demand for coins.
- Investor sentiment, both positive and negative.
- Government regulation, both promoting and discouraging the use of non-fiat currencies.
- Media hype and publicity, both good and bad.
- Hard forks resulting in new coins, supply, and demand.
- The total node count on a blockchain.
Stay up to date on the news, read articles by influencers, and use data from exchanges to inform your decisions. With this knowledge, you’ll be able to make money in the cryptocurrency market today!
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Frequently Asked Questions
What is cryptocurrency?
A cryptocurrency is a digital or virtual asset designed to work as a medium of exchange. Cryptocurrencies are decentralized, not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009.
How do you buy cryptocurrency?
You can purchase cryptocurrency on a crypto exchange like Coinbase. To do this, you will need to create an account and verify your identity. Once your account is verified, you can link your bank account or credit card and start buying crypto. Alternatively, you can also earn crypto by completing tasks on platforms like Earn.com.
How does Bitcoin mining affect prices?
Bitcoin mining is the process of verifying and adding transactions to the public ledger. Mining also adds new Bitcoins to the market. The number of new Bitcoins created in each block is reduced by 50% every four years. This halving process will continue until all 21 million Bitcoins have been mined. As the supply of new Bitcoins decreases, prices are usually driven up.