Cryptocurrency prices can be highly volatile, but several factors influence the price of Bitcoin and other cryptocurrencies. Some factors are external, while others are internal to the market, but all of them play a role in determining how cryptocurrency trades each day in exchanges around the world. Below are three of the biggest factors influencing cryptocurrency prices.
What Factors Affect The Market Price Of Cryptocurrencies?
To learn what factors influence the market price of cryptocurrencies, you first need to understand the different types of value that affect their market price.
Broadly speaking, two types of values can lead to a spike in prices - monetary value and technological value.
Monetary values are often tied to other external factors such as banking, business, commerce, economics, and investment. Technological values include utility functions for blockchain transactions. Utility functions may be internal to the company such as processing or storage capacities or external with peer networks through transaction fees, block rewards, or network charges. The most important point is not just how much something is worth but also who is willing to pay for it (i.e., who has money). Some investors might have more trust in certain industries than others; for example, an investor might be more likely to invest in stocks from a company involved in banking because they feel confident about their ability to predict future changes in financial markets. Other investors might have more trust in businesses involved with commerce because they believe commerce will always exist. These beliefs might also extend to companies that provide services related to economic trends like retail, transportation, construction, and farming.
Similarly, some people might invest in utilities due to high expectations for the economic future of regions such as China or India while others could focus on commodities because they think economies will slow down and people will start buying more goods at home instead of importing them.
There are many factors affecting cryptocurrency pricing so it’s impossible to pinpoint one specific cause. Let's take a look at the three most common factors influencing cryptocurrency prices;
1) Value Of Previous Transactions
Why does the value of a cryptocurrency fluctuate? Generally, it has to do with how widely accepted the coin is by users. The value of previous transactions also plays a big role in determining their worth. More transactions translate to more demand for the currency, which will drive up the price.
If a lot of people are buying and selling it at that moment, then many new currencies are entering the market for exchange, which will cause it to lose some value. However, if fewer people are buying and selling the currency, then less money enters the market. That makes each transaction a little more valuable because not as much money is coming into the marketplace.
It’s important to keep in mind that if there’s not enough liquidity (money) on both sides of an equation, it could be difficult to make trades happen fast enough or at all. For example, let's say you have 100 Litecoins and want to trade them for Ethereum. Since this isn't happening often right now, the only person who wants your Litecoins might be willing to give you only 75 Ethereum coins instead of 100 due to their risk tolerance.
Remember that while digital currencies offer a great deal of convenience in transferring funds from one person to another quickly and easily, they're still susceptible to fluctuations just like other assets.
2) Number of Participants
Cryptocurrencies are digital currencies that are not controlled by a central government. Unlike the USD, for example, which is regulated by the US government and is backed by assets like gold, cryptocurrencies rely on networks of participants who maintain an online ledger of transactions to track how much each cryptocurrency is worth at any given time. As the number of participants in these networks grows or shrinks, so does the value of each cryptocurrency.
It's this simple equation that's made Bitcoin (the first and most well-known cryptocurrency) skyrocket from $1,000 per coin in January 2017 to over $19,000 per coin in December 2017. When you have more participants contributing to the network, your currency becomes more valuable because there is greater demand. The reverse can also be true: as more people leave a network, your currency becomes less valuable because there is less demand.
One way participants contribute to these networks is through mining. Essentially, mining involves solving complicated math problems with powerful computers until you find the right answer, known as finding a block. Once a miner finds a block, they're rewarded with newly minted coins. Participants can either mine solo or participate in mining pools. These groups work together to solve blocks more quickly and share the reward among participants. Each pool sets its own rules about what percentage of the reward goes to different participants but generally speaking miners get a small piece of it. If you don't want to invest the money needed to purchase expensive mining equipment, there are other ways to mine virtual coins.
Another way participants interact with these networks is through trading—buying low and selling high as markets fluctuate. The third major influencer on cryptocurrency prices is legislation or regulatory issues around ownership and trading. Government intervention can have a big impact on price because it influences investor sentiment. For example, when China decided last year that Chinese banks couldn't accept Bitcoin as payment, the price dropped sharply overnight. Similarly, earlier this month, Indian officials announced plans to scrap 500 and 1,000 rupee notes to combat corruption. A response to this increased Bitcoin's exchange rate by 18%. Participants make all the difference in determining how valuable each cryptocurrency will be.
3) Amount of Media Attention
Media attention can have a significant effect on the cryptocurrency market, including both the Bitcoin and Ethereum markets. When media headlines focus on a certain event or incident in the world's political climate, journalists will often analyze how it may impact one of these two markets. For example, when China banned cryptocurrency exchanges from operating in their country this past September, there was an almost immediate drop-off in volume for Bitcoin. With traders unsure about what to do with their Bitcoins, there was little to no buying pressure, leading to an initial price decrease.
On the other hand, while Ethereum did experience some volatility during this time as well, the price has steadily risen since then. Investors know that the Ethereum blockchain is integral to smart contracts which makes it much more valuable than Bitcoin which is just a digital currency. The recent partnership between Microsoft and ConsenSys shows that people are beginning to place more value on the capabilities of the Ethereum network.
Consequently, this most recent fluctuation by China only had a minor impact on both currencies' prices. However, if this becomes a larger trend among countries, we may see another major shift in where investors want to put their money. If you're interested in investing your money into cryptocurrency, take note of what impacts global news events like this could have on the potential growth rate of your portfolio. Always be aware of what influences factors could play into deciding whether you should invest in Bitcoin, Ethereum, or maybe something else entirely.
Conclusion
Furthermore, because cryptocurrency is primarily digital (as opposed to paper currency), some people speculate that increased regulations could lead to a decrease in price. Others argue that those who are behind regulations are trying to protect traditional banks' interests, which has led to speculations that cryptocurrencies could see a resurgence once again as financial institutions become more accepting of them.
Many factors can influence the cryptocurrency market, but these three are the most common. In conclusion, anyone looking to get into investing in cryptocurrency should keep these three most common factors in mind to minimize risks and maximize returns!