Have you ever wondered what determines the value of cryptocurrencies? Well wonder no more! Here’s a list of some factors that affect their price and why it changes.
1. Supply and demand
Let’s take the most popular crypto as an example: Bitcoin. The supply and demand of Bitcoin plays a big factor in the prices. Currently, there is supposedly a cap of 21 million Bitcoins. When that cap is reached, Bitcoin mining will no longer create new Bitcoin. The supply of Bitcoin has reached 16.8 million in January of 2017, meaning that around 80% of the total amount of Bitcoin have already been mined and made available to the public. As we all know in general economics, the price goes up when the demand cannot keep up with the supply.
There are two types of factors that can affect this: Internal factors and External factors.
a. Traders – People who actively trade cryptocurrency can greatly affect the rise and fall of the rates. Middle traders depend on the major traders’ choice to buy, sell or hold. Lastly, major traders try to manage the price fluctuations through market tools subject to appropriate market conditions.
b. Crossed Influence Of Different Cryptos – Simply put, when the price of bitcoin goes up, the price of altcoins drops in fiat value, and cheapens further in relation to BTC.
This happens because, with BTC price growth, altcoins’ fund is pushed to bitcoin. In such a case, only altcoins having strong support can maintain its position.
a. Global Adaptation – As people, stores and companies slowly start to accept crypto as forms of payment then this could increase its demand. The opposite applies if more people reject it.
b. Updates on the Crypto-software – A good example of this is the Segregated Witness, popularly known as SegWit. When the SegWit activated, Bitcoin doubled in price.
c. Mass Media & Influence – Positive or negative insights by influential figures can affect how people perceive cryptocurrency and can therefore affect its market prices.
d. Trade Market Integration – When popular cryptocurrency platforms such as Paxful starts accepting a new cryptocurrency then that crypto’s legitimacy increases and so does the demand for it. Networks are created through these kinds of marketplaces as the exchanges become more popular. This is because it becomes easier to gain more participants. The price is affected by this as it has a direct effect on the popularity of Bitcoin, as more people buy and sell.
e. Political Events – Big news such as China’s decision to completely ban ICO’s from being staged in the country, as well as the closing down of domestic exchanges can cause prices to tumble down.
Although it is believed that Bitcoin is the most popular cryptocurrency, there are over 1000 forms of cryptocurrencies in circulation. Examples of other cryptocurrencies are Litecoin and Ethereum. The presence of competition keeps the value of an investment in check. For example, the value of the U.S. Dollar would have been different if stronger currencies didn’t exist such as the Euro, the Yen, or the Pound.
3. Its Own Internal Governance
Since Bitcoin is not regulated by singular authority, miners are put on the spot to process transactions and secure the blockchain. If they wanted to tweak or change the software, then it has to be the decision of the consensus. Because of this, members of the Bitcoin community feel that solving fundamental issues can sometimes take too long, particularly the issue of scalability.
At this moment, the Bitcoin software is only able to process around 3 transactions per second, which is incredibly slow for how popular it is. As of now the community is trying to figure out ways to speed up the number of transactions. When these changes are applied, they turn into a whole other cryptocurrency. Examples of this are bitcoin cash and bitcoin gold. Investors then sometimes decide that the new currency isn’t as valuable, thus the new currencies not having enough value as Bitcoin.
As with all goods and services, the utility of a cryptocurrency plays a big role in its price. If a new cryptocurrency is created but offers no new solutions or perks then it will not retain investor interest in the long run. However, if it offers something new and useful then it will rise in demand.
A good example of a new cryptocurrency that offered something different than Bitcoin is Ethereum. Whilst Bitcoin is just a cryptocurrency, Ethereum is actually a ledger technology that people can use to build new programs and its potential applications opens so much opportunity. Its token is what we call Ether. People use Ether to trade. Sometimes it is also used inside Ethereum to run applications and monetize work.
5. The Price of Bitcoin
Bitcoin is the king of all crypto. What happens to it will reflect on all other cryptocurrencies. When Bitcoin prices go up, the crypto market follows and when it goes down, the market dips. And if the top cryptocurrency is doing bad then why would investors even buy other altcoins?
Also, most crypto exchanges require the exchange of bitcoin for other coins, making it like a crpyto reserve currency. All other cryptocurrencies is pegged on Bitcoin so every price is also heavily reliant on bitcoin to an extent.
We all know that there is no one authoritative figure in charge of bitcoin, unlike with fiat money where armed guards protect the bank. Cybersecurity could also greatly influence the price of crypto. A well-known hack attack happened back in 2014 in Mt. Gox, where they lost $750,000 worth of bitcoins (back then it amounted to $470 million). The incident caused bitcoin to drop to around 36 percent. But if you think about it, regular banks are also prone to robbery, security hacks and heists. So it is only a matter of educating yourself with ways on how to properly protect your money, regardless if it is online or not.
What other factors do you think can affect the price of Bitcoin? We’d love to hear from you! Let us know in the comment section down below.