Cryptos are one of the most volatile asset classes. Cryptos are never uncommon to record 3-digit losses or gains in one day. This is because they struggle with supply and demand forces. Such a feature of crypto has allured fearless traders to the markets. They are ready to hit a fortune.
Risk-averse investors stay away from this space. Cryptocurrency prices may work as they like. But there is a science behind their price fluctuations. Read along to know what determines a crypto price. The users must know many surprising facts about Bitcoin, and they can grab the link for more info here.
Supply and demand factors
Cryptos are different from other assets. But still, supply and demand forces govern them. Prices of crypto increase when there is a demand spike among traders. An oversupply of it will cause a fall in its prices.
To balance supply and demand forces, crypto projects employed broad processes for controlling and circulating tokens. Some processes get implemented in the minting stage of the token. It is for regulating new tokens’ creation. For instance, only a fixed amount of Bitcoin will enter circulation with every mined BTC block. Using one fixed maximum crypto supply is another method to maintain equilibrium, with BTC going the extra mile by introducing a feature of halving for creating scarcity.
New tokens’ minting
New tokens’ creation plays one integral role in the prices of cryptocurrency. Cryptos create new tokens via mining, especially those with a PoW consensus mechanism. Such a method of crypto mining frequently needs costly mining tools and a large supply of electricity for functioning.
Considering the high cost of this process, miners will be incentivized to secure the blockchain network when they are rewarded well for their efforts. The complexity of a particular crypto’s mining process leads to an increase in the price. It is pretty evident in Bitcoin and Ether.
These are the two largest cryptocurrency networks that reached price highs of $64,789 and $4,891, respectively. They consume the most electricity in the process of mining.
Fundamentals
Crypto traders often approach this market by staying focused on the technical. They peer at the charts for long hours. Yet reports and activities around a specific crypto project are often predictable in determining prices.
For example, technological advancement reports will precede one bullish run. London hard fork of Ether and Alonzo hard fork of Cardano was the precursors for this bullish run. It led to the all-time price highs of their native tokens.
Any negative report around a crypto project will be sending prices to crash to rock bottom as it will trigger waves of bearish sentiments. Historically reports of some security breach or any botched upgrade led to falling prices. 2016’s DAO hack lead to the decline of Ether.
Listing on crypto exchanges
Crypto exchanges play vital roles in determining crypto prices. Projects that are listed on well-known exchanges increase the options of investors. It leads to enhanced demand. Such a spike in demand will correlate to any increase in the prices of an asset.
For any crypto project listing on smaller exchanges, institutional and retail investors will never have diverse options for investing capital in such projects.
These exchanges play the role of providing liquidity to crypto traders. Low liquidity levels are frequently behind the high volatility of this market. The presence of high liquidity makes sure that the price swings are never chaotic.
BTC and other significant capital cryptos do not go through 3-digit swings in one day. Yet cryptos with small caps are susceptible to increased volatility levels.
Regulations of government
Prices of cryptos rise and fall. It can be linked with the actions of legislative houses and government agencies. A positive law giving crypto legal status in a jurisdiction will send prices to new highs. A crackdown on crypto activities will spell bearishness for its prices.
Last year the infamous crackdown of China on crypto activities almost sent the ecosystem into a cryptocurrency winter. The prolonged court case of the SEC with Ripple Labs adversely impacted the price of XRP.
Bitcoin ETFs approval in the U.S. and the EU’s decision not to ban PoW cryptos within its borders has been a bullish moment for crypto prices worldwide.
Conclusion
Several factors determine the prices of crypto interplay. Understanding such factors as exchanges, media reports, government regulations, and the duo of supply and demand is essential. It will be an extra advantage for traders. It will aid them in making the proper trading decision.
We try our best to fact-check and bring the best, well-researched, and non-plagiarized content to you. Please let us know
-if there are any discrepancies in any of our published stories,
-how we can improve,
-what stories you would like us to cover and what information you are looking for, in the comments section below or through our contact form! We look forward to your feedback, and thank you for stopping by!
Next Article
