There is no surprise when I say various cryptocurrencies decrease or increase by 10% on a given day. It is very common for even bitcoin and other smaller cryptocurrencies to show such variation.
However, the question is, what are the factors that can make cryptocurrencies go up or down? Or what are some predictive variables responsible for the hike or downfall in crypto prices in the coming period?
This article will give you an idea about what makes crypto prices vary in a very short period and how valuable cryptocurrency is. In the end, I will provide you with some tips to maximize your cryptocurrency investments.
Variables That Affect Cryptocurrency Prices
It is not usually governed by any central authority. Although, a back from the government can enhance the trust level of customers in a particular currency. But, cryptocurrencies are generally decentralized. Their values are driven by some other sources.
1. Supply and Demand
The most important factor for the crypto prices to go high is their supply and demand. The supply of a particular cryptocurrency is always known to investors. Currencies like Bitcoin have a fixed supply, whereas some, like Ether, do not. On the other hand, there are cryptocurrencies that burn the tokens in order to regulate their supply and demand.
The demand for a project increases as its awareness increases and becomes popular among the investors, and they start to adopt it globally.
2. Exchange Availability
The most popular cryptocurrencies, including Ether and Bitcoin, are available for trade on various exchanges. Simply, any cryptocurrency exchange is going to list the mainstream tokens.
However, some investors are limited to smaller token availability, as such tokens are only accessible via selected exchanges. Then the option left is wallet providers, but they charge their fees which increase the amount of investment. Moreover, the exchange may be too big for some investors if a particular currency is traded thinly on a small exchange.
If somehow, in 2022, we are able to get the cryptocurrencies listed on more exchanges globally. It will increase the demand for cryptocurrency by improving the number of investors. As the demand increases, prices will ultimately go up. The utilization of the best cryptocurrency tools will help in regulating the exchanges.
3. Production Cost
New digital tokens are delivered through a cycle called mining. Digging for digital money includes utilizing a PC to confirm the following square on the blockchain. The decentralized network of excavators is the thing that permits cryptocurrency to function as it does. In return, the convention delivers a prize as Crypto tokens, along with any expenses paid by the trading clients to the miners.
The process involves verification of blockchain and is a completely digital process requiring electricity consumption and highly expensive equipment. A proof-of-work system, used by Ethereum and Bitcoin, has more competition for mining a particular cryptocurrency, making it more challenging for a miner. Because it requires miners to solve a complex math problem making them race against each other for verifying a block.
Hence, it increases the cost to mine. Therefore miners only mine cryptocurrencies having higher value to offset their mining cost. Since it is essential for the miners to make the blockchain function in order to mine, it increases the demand for using blockchain, keeping the prices of the currency high.
4. Internal Governance
As written in the papers by Assignment Assistance UK, it is very rare that cryptocurrency networks fall under any static set of rules. Usually, developers acclimate projects on the basis of the user community. There are some governance tokens as well, which give their holders an option with how they can use the token or mine it. The changes in the governance of a token are undertaken by a consensus among the stakeholders.
For instance, if Ethereum is updating its system to a proof-of-stake system from a proof-of-work system, it will ultimately render the costly mining equipment in data centers useless, leaving an impact on the value of Ether. Therefore, investors value stable governance. Where things are hard to change makes it more valuable in the eyes of investors.
Similarly, if an update takes a lot of time in a particular cryptocurrency to improve the protocols, it will also impact its value.
5. Competition With Other Cryptocurrencies
There are a large number of various cryptocurrencies in existence, with new tasks and tokens sent off each day. The boundary to passage is generally low for new contenders, yet making suitable digital money additionally depends on building an organization of clients of that particular currency.
A valuable application on the blockchain can rapidly assemble an organization, particularly on the off chance that it develops a restriction of a contending application. For instance, another contender acquires force. It takes esteem from the current rivalry, in this way sending the cost of the occupant down as the new contender’s token sees its value move higher.
6. Laws and Regulations
It’s always in the discussion that who will be regulating the cryptocurrency exchange. Where CFTC (Commodity Futures Trading Commission claims Crypto being commodities like coffee or gold. On the other hand, the SEC (Security Exchange Commission) says cryptocurrencies are securities like stocks and bonds.
So, there is a clear dispute between the two. A determined ruling will impact the value of cryptocurrency in a better way. It will provide clarity among the investors and will open the doors for more products. Hence the regulation is necessary for easier cryptocurrency trade. According to the Bloomberg “Products like ETFs or future contracts will have a great impact with the clarity of regulations in cryptocurrency giving investors with more access to cryptocurrency. Taking short positions and betting against the prices for future contracts in cryptocurrency will definitely reduce the volatility of Crypto prices.”
Investing In Cryptocurrency
If you can understand the factors affecting the prices of cryptocurrency, it will be relatively easier for you to invest in cryptocurrency and earn some profit. For instance, you analyze that the demand of a particular cryptocurrency will go up due to X, Y, Z factors; however, the supply will remain the same, so you should invest in that cryptocurrency at the time. However, you should always keep an eye on the government’s laws and regulations regarding cryptocurrency in any particular region
Claudia Jeffrey is currently working as an Editor QA at Crowd Writer. She often helps students with a request to write my dissertation for me. Claudia is passionate about technological advancements and keeps a keen eye on crypto trading. She loves to travel solo and explore the beauty of nature.