What Are the Factors That Affect the Value of Cryptocurrency?
Since the advent of the market-dominating cryptocurrency, bitcoin (BTC), in 2009, digital assets are the most volatile assets in the world. Some people have been attempting to fully understand the causes of cryptocurrencies’ abrupt rise and fall, what drives their prices, and why they sometimes seem to be stable.
Understanding each factor that impacts the price of Bitcoin and its counterparts is important because it may help you decide when and how to invest in them. Knowing all of these things will also help you decide if they are good assets to consider investing in.
Follow along in this article as we go over five fundamental elements that affect or determine the value of cryptocurrencies.
Five key factors that affect the value of cryptocurrencies
- Demand and Supply
- Users’ Sentiment
- Media hype and news
- Government Regulations
- Coin Utility
An in-depth look at the key factors that affect the value of cryptocurrencies
Demand and Supply
Supply and demand heavily influence bitcoin and other cryptocurrencies, just like those of most other commodities, investments, assets, and products. Again, the major forces behind most assets, including cryptocurrencies, are supply and demand. Demand is simply the amount that is being bought, while supply is the amount that is being sold.
In the case of Bitcoin (BTC), only 21 million units will ever exist. This indicates that there is a finite supply of the leading coin. Less than 2 million bitcoins are still available for circulation as of right now when approximately 19,268,762 have just entered the market.
Crypto mining is the process by which new bitcoin tokens are placed into circulation. However, demand for cryptocurrency will increase as more people choose to use it as a payment method or for other purposes. Because of the need for mining coins more quickly to meet the increased demand, makes it more difficult to produce new coins; hence, the price goes up.
Meanwhile, the value of the mentioned cryptocurrency will decline noticeably if there is little interest in it.
Users’ Sentiment
Users’ or investors’ sentiment is an indicator revealing how customers view a particular asset and their behaviors toward it. This “sentiment” drives demand and supply, discussed above, which in turn leads to price movements.
Market sentiment is bullish when prices are rising, whereas it is bearish when prices are falling. The best example of bearish market sentiment was when both retail and institutional investors were afraid that the end of the crypto market had come after the abrupt collapse of the once-dominant cryptocurrency exchange FTX. Investors’ outlook towards the security of digital assets at that time was negative, thereby driving down the price of Bitcoin and other cryptocurrencies to lows not seen in more than two years.
However, the market appears to be recovering now that the impact of the collapse has faded and market participants’ sentiments have improved positively. They are now aware that there are many more great things to come beyond the brief crash.
Media hype and news
Cryptocurrency is one of the subjects receiving the most media attention. Even though some people think that this technology is confusing and risky, enthusiasts continue to ardently promote it.
For instance, many people will be willing to go all-in on a digital asset promoted by an influencer or a news source they trust. On the other hand, they are most likely to dump or avoid buying a coin bad-mouthed by such influencers.
For instance, the CEO of Binance, Changpeng Zhao, or “CZ,” is undoubtedly one of the most prominent cryptocurrency influencers in the space. The trouble with the now-defunct cryptocurrency exchange FTX began when CZ announced that his company would be liquidating all of its FTT (FTX’s native token) holdings, citing some issues with the company.
Millions of people were afraid of the statement and began to dump the crypto token, eventually leading to a free-fall from over $51 recorded in early 2022 to less than $1. It now trades for just a little above $2.
Moreover, media hype and news create FUD (fear, uncertainty, and doubt) and cause many traders to engage in what we call FOMO (fear of missing out).
Particularly new cryptocurrency projects that are not yet well known. They are quite often promoted in order to generate interest, momentum, and buyers or adopters in the market. After gaining the confidence of numerous investors, the majority of these coins will see a substantial increase. Sadly, these projects are usually abandoned as soon as the creators and influencers make profits.
Government Regulations
Although governmental organizations or bodies cannot directly control the issuance of cryptocurrencies or set their prices, some of their policies may have a significant impact on them indirectly.
While many think that consistent global regulation of cryptocurrencies will boost their acceptance and level of trust among major investors, many still believe that regulation will undermine the true decentralization feature of cryptocurrencies and blockchain technology.
On January 18, 2023, Bitcoin suffered a brief decline after the American SEC accused Bitzlato, a little-known cryptocurrency exchange, and its founders of transmitting over 700 million dollars worth of cryptocurrencies without a license. This clearly shows that regulatory actions — no matter how minor — typically have an impact on people’s attitudes towards the market, which in turn affect prices.
Consequently, some investors appeared to find the absence of regulations to be a compelling reason to join in, but others are gleefully anticipating what a regulated future may hold.
Coin Utility
Industry leaders have repeatedly stated that cryptocurrencies with utility are a prudent long-term investment. In the crypto world, digital tokens created on a particular blockchain ecosystem — either based on BSC’s BEP-20 standard or other networks — and giving token holders specific rights within the ecosystem are referred to as “utility tokens.”
For instance, the MelegaSwap ecosystem’s Baby Token (BABYMARCO) rewards owners with $MARCO and also unlocks new opportunities like voting rights and access to premium NFT collectibles for holders.
Similarly, a lot of investors purchase bitcoin due to the authorities’ and investors’ high level of trust in it. Although bitcoin can increase financial inclusion and enable cross-border transactions, some people believe that it only has limited uses.
However, Ethereum and similar networks are the preferred ecosystems as a result of scalability and the ability to build decentralized applications on top of them. As more people become aware of the benefits these ecosystems may provide, their adoption and token prices tend to increase.
Closing Thoughts
We hope that this article has given you some insight into the key factors that influence the prices of Bitcoin, cryptocurrencies, and other types of digital assets more broadly. Notably, we may rightly say that the most important factor impacting cryptocurrency prices is investor sentiment, which is influenced by a variety of reasons including supply, demand, news, hype, coin utilities, regulatory measures, and so on.
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