Categories: Crypto Currencies

What Drives The Price Of Cryptocurrency?

You can often hear a comparison of cryptocurrency with gold. Indeed, mining itself is translated as the extraction of minerals, in addition, the resources expended in relation to profit are indeed similar to gold mining. The popular bitcoin forms its value through uniqueness and consumer demand. Moreover, its cost includes only three components: the cost of farm equipment, electricity and transaction fees.

What Determines the Price Of Cryptocurrency?

Cryptocurrencies have no collateral in the form of physical assets – gold, precious metals, or raw materials (oil, gas, grain) and even securities. However, startups are trying to solve the problems of high volatility of cryptocurrencies by launching special settlement digital money called stablecoins.

Cryptocurrencies are backed only by goods purchased for them. When it comes to backing a currency, the currency needs to be backed by an existing asset. But the problem is that the provision of, in particular, stemcoins, levels out the main principles of the blockchain – distribution, decentralization and independence from influence. Stablecoins are at the initial stage of their development, therefore, we are talking about the value of cryptocurrency in terms of cost price:

  • Electricity costs for mining;
  • Investments in the mining farm;
  • Transaction fees.

Also read : The Future Of Bitcoin: A Profitable Investment or A Big Bubble?

What drives the rate of cryptocurrency on the exchange?

The price on cryptocurrency exchanges is formed according to a simple rule: the ratio of supply and demand. The higher the demand, that is, buy orders, the higher the price, respectively.

Buyers and sellers on exchanges can have different goals, thus generating different prices. Due to the absence of constraints on fluctuations in cryptocurrency prices (as, for example, in fiat currencies from the state and regulatory international economic bodies), they talk about problems with reputable liquidity providers (when trading fiat, these are banks) – a factor in the difference in prices on exchanges.

Popular factors affecting the supply and demand of cryptocurrency are:

  • Attempts by regulators to find tools to establish supervision over the cryptocurrency market (cloud services are located on servers in different countries, and the anonymity of digital money complicates the process. A number of countries (Iceland, China) are trying to ban crypto);
  • Conducting forks and technological events that lead to both drawdown and takeoff;
  • Problems of cryptocurrency exchanges that are related to regulation or security (hacks) and the lack of reputable liquidity providers;
  • Strong correlation of bitcoin and major altcoins (both direct and mirror) in relation to other altcoins;
  • Interest of traders.

1- Influence of fundamental factors on the price of cryptocurrency

It is known that fundamental factors are almost irrelevant, but this is not entirely true. They have an indirect impact on pricing. Consumer price indices, GDP, statements by heads of national banks do not affect the prices of coins in the cryptocurrency market in any way, but they do affect investors and traders who make decisions about buying or selling coins. All factors affecting cryptocurrency rates can be divided into three large categories: economic, technical and those related to the demand for the coin.

2- Economic forces

The price of Bitcoin and altcoins is constantly changing. The economic factors that affect it include:

  • use of digital assets in real financial transactions;
  • volumes of coins issue;
  • average transaction rate.

Analysts are constantly analyzing indicators of the ratio of the volume of BTC used to pay for goods and services in real transactions, and trading on the exchange without a real supply of coins. It turns out that the higher the volumes on the exchange, the more often the currency is used for financial transactions in the real world. This has a beneficial effect on the coin rate.

Also read : How Does Cryptocurrency Increase In Value?

3- Technical factors

The emergence of new platforms, increased investor interest and the creation of innovative technologies have a beneficial effect on the price of digital coins in the long term. The development of the cryptocurrency market is based on opposition to traditional economic foundations and principles.

The creators of cryptocurrency platforms strive to achieve privacy, decentralization, cheapness and speed of transactions. The more perfect a digital asset is, the more chances it has for confident growth in the market.

4- Demand for coins

The interest of traders and investors in bitcoin market and other digital coins affects their rate, but not as much as many imagine. In fact, interest only increases the demand for tokens and pushes the price to the desired levels. This information is important for traders who are used to making money on short-term transactions. For long-term investments, this method practically does not work.

5- News background

It was said above that it is important to control the news of the economy and events in the world of cryptocurrencies, but Bitcoin also depends on the general hype. Word-of-mouth public interest often raises or lowers the price of a cryptocurrency.

Very often bad news and the collapse of the digital currency rate go in one team. A pre-launched information rumor generates excitement and panic on the stock exchange. Correction is a slight change in the value of a cryptocurrency in the direction opposite to the current trend. On the crypto market, the correction can reach 50% of the asset value.

Olivia Chloe

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