Introduction
Cryptocurrencies are decentralized, encrypted digital or virtual tokens that use cryptography to verify and control new units. Cryptocurrencies are not governed by any government or financial authority. Bitcoin, the first and most famous cryptocurrency, was developed in 2009.
Cryptocurrencies have seen a tremendous increase in value over the past year, with the total market cap for all cryptocurrencies reaching nearly $2 trillion at its peak. However, this value has since declined to around $1.6 trillion in February 2022. So why do prices go up and down? Numerous factors can influence prices, including market supply and demand, global economic conditions, public interest and perception, regulatory environment, and overall trust in the system.
How market supply and demand affects prices
Market supply and demand are the most basic economic concepts and are the main driver’s of digital currency rates today. When the demand for a product or service exceeds supply, prices will rise as seller’s profit from the higher market. When supply exceeds demand, prices will fall as buyers compete for lower-priced goods.
Cryptocurrencies are no different and are subject to the same laws of supply and demand. As interest in cryptocurrencies has increased, so has the need, driving prices upward. Conversely, as public interest fades, demand results in lower prices.
Differences between cryptocurrencies and stocks
Cryptocurrencies are not tied to a company with a maximum number of shares. Because they have no “corporate” structure, the supply in the market is only limited by how many coins or tokens were created and can be released into the market at any time. This represents one of the most compelling reasons for cryptocurrencies’ popularity because investors do not have to wait for a company’s quarterly reports to see their value rise. However, this dynamic can also cause wild swings due to market manipulation and other factors.
How global economic conditions impact prices
Cryptocurrencies are global and are not subject to any one country’s economic conditions. However, global financial needs can still have an impact on prices. A good example of this is, if the global economy is weak, investors may flock to cryptocurrencies as a safe haven investment. Conversely, if the global economy is strong, investors may sell cryptocurrencies to take advantage of higher-priced investments elsewhere.
The global economic environment is continuously changing, and investors need to pay attention to the latest news about economic events that could impact cryptocurrency prices. For example, suppose a country’s currency crashes and its central bank begins printing more money to stabilize the market. In that case, demand for cryptocurrencies could increase as people lose faith in their government-backed currencies.
How public interest and perception drive prices
Public interest and perception are two of the most critical factors influencing cryptocurrency prices. When people are interested in a product or service, demand increases, and prices rise. The same is true for cryptocurrencies. As more individuals become aware of Bitcoin and other cryptocurrencies, demand for these assets rises, pushing prices higher.
Perception is also critical to cryptocurrency prices. People need to trust that the system is secure and that their investment is safe. When confidence in cryptocurrencies diminishes, prices can quickly drop. For instance, after China announced it would crack down on cryptocurrency mining, the price of Bitcoin fell by over 7% in just 24 hours.
How regulatory environment impacts prices
Cryptocurrencies are still relatively new, and their prices are highly volatile. The regulatory climate might have an impact on pricing. When a country introduces regulations that restrict or prohibit the use of cryptocurrencies, prices can go down.
On the other hand, prices can go up when a country adopts favorable regulations for cryptocurrencies. The regulatory environment for cryptocurrencies varies around the world. While some countries, like Japan and South Korea, have created legal frameworks that enable cryptocurrency trading to flourish, other nations have made it illegal or are just beginning to consider how their laws apply. To give an instance, Russia has actively discouraged people from using cryptocurrencies by announcing plans to ban cryptocurrency use.
How technological development impacts the cryptocurrency prices
When new blockchain technologies are developed, it can cause the prices of cryptocurrencies to go up or down. For example, when the blockchain platform Ethereum was developed further, the price of Ether went up.
This is because Ethereum offered new solutions to the apps built on blockchain, and it showed potential for the future. On the other hand, when Bitcoin Cash was developed, the price of Bitcoin went down. This is because Bitcoin Cash was a fork of Bitcoin, and it did not offer any new utility.
Why overall trust in the system is important
One of the critical factors determining cryptocurrency prices is overall trust in the system. When investors feel confident that the system is stable and secure, they are more likely to invest, which increases costs. Conversely, when investors lose confidence in the system, they are more likely to sell their coins, decreasing prices.
Several things can affect overall trust in the system, including security breaches, hacks, and scams. For instance, when Mt. Gox, one of the largest Bitcoin exchanges at the time, was hacked and lost over $450 million worth of bitcoins, confidence in the system plummeted, and prices dropped significantly.
Investors will most likely purchase coins when confident that their assets are in good hands and secure exchanges.
Conclusion
The cryptocurrency market is a complex system that relies on an intricate network of factors. This equation has many moving parts, but the three key components include public interest and perception, global economic conditions, and supply and demand. The three main reasons prices fluctuate over time are because people’s perceptions change about cryptocurrencies in general or specific coins. Certain countries enact legislation restricting the use of digital currencies, or investors buy more than they sell at any given moment-driving up prices as well as their investment portfolio values. Understanding these drivers will help you make informed decisions when investing your hard-earned money into digital currency markets.
Overall, the cryptocurrency market is highly volatile and unpredictable. You should not invest money you cannot afford to lose.