You see cryptocurrencies trending over the news every now and then and it’s not just Bitcoin, there are thousands of other cryptocurrencies that steal the spotlight at times. 2020 has been a especially interesting year as far as cryptocurrencies are concerned, as we observed high rates of acceptance for digital assets amongst the masses.
While you might have heard about unbelievably high changes in the price and value of cryptocurrencies, have you ever thought about what factors influence the crypto prices? If you think crypto prices are determined intuitively, you’re wrong. As a matter of fact, there are a lot of factors that contribute towards influencing crypto prices all across the world.
Supply and Demand
The interaction of supply and demand is a very strong thing and is a determinant of a lot of things from floating currency rates, to prices of goods. Supply and demand is the basis of a free market, which aligns perfectly with the concept of decentralized transaction systems and cryptocurrencies are an example of that.
Given that there is a fixed number of a cryptocurrency that can be mined, there’s only a fixed number of maximum amount of a cryptocurrency that can ever come into circulation. If there’s a reduction in the supply i.e. the number of a cryptocurrency entering the market, its price will go down, considering other factors remaining constant.
Similarly, the demand for bitcoins is also determined by the market itself. With more and more people showing interest in and purchasing cryptocurrency, its price will be driven up, right in line with the principles of demand and supply.
Cost of Production
To understand how the cost of production influences the prices of a cryptocurrency, let’s take a look at Bitcoin for example. Bitcoin doesn’t appear out of thin air and is instead mined out. Bitcoin mining refers to sophisticated computers solving complex cryptographic math and the miners are rewarded with a block of bitcoin. The algorithm only allows one block of bitcoin to be mined every 10 minutes, which means that as more people join to mine bitcoin, it becomes more difficult and more expensive to mine it out.
The cost in this scenario is the electricity consumption that allows computers to operate at such high levels of sophistication. The greater the cost of production, the more expensive a cryptocurrency is likely to be.
Popularity plays an important role in driving the prices of a cryptocurrency up or down. Now that we’ve established that the demand is an important determinant of crypto prices, it would be easier for us to understand how popularity plays a role in it.
Simply put, as the popularity of a cryptocurrency rises, the demand also follows the same trajectory. Often, this results in an exponential rise in the price of a cryptocurrency as increased popularity or hype that is generated around a cryptocurrency creates a domino effect and everyone jumps on the bandwagon in an attempt to make profits.
As the popularity of a cryptocurrency goes up, so does the demand. With an increased demand, the prices also continue to rise.
Regulations can also play a role in determining the price of a cryptocurrency. If a country imposes strict regulations that make it difficult to trade and utilize cryptocurrencies, it is likely to have a negative impact on the prices and popularity of cryptocurrencies. Government institutions and courts are usually the biggest stakeholders as far as this factor is concerned.
Volatility is another determinant of crypto prices. Volatility determines how risky a cryptocurrency is, which might increase or decrease the price of it, in accordance with the risk tolerance of the market. In cases where the volatility is high, you can utilize applications such as the Yuan Pay Group to capitalize on it and make the volatility work in your favor.
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