Cryptocurrency prices can be volatile. Thanks to this volatility, crypto investing can be risky and also have the potential for high rewards. This necessitates investigating the elements that may contribute to crypto price changes. Discussed below are five factors that affect cryptocurrency prices.
1. Demand and supply
Unlike fiat currencies, many cryptos have a limited supply that can’t be increased at will, creating an asset class with verifiable scarcity. Usually, high demand for crypto results in high prices. Inversely, the more units of a crypto there are in the market, the less valuable every individual coin is. If a substantial amount of cryptocurrency is available to the public, its price will likely fall. For instance, as more people become more interested in Bitcoin, its demand rises. If Bitcoin’s demand surpasses its supply, the price increases. Conversely, the Bitcoin price drops when there’s less demand and more supply.
2. Government regulations
Crypto is an inconsistently regulated asset class, with jurisdictions globally making different rules for cryptocurrency. Government regulations significantly influence crypto prices in various ways, including the following:
- When governments give clear regulations on crypto use, it can result in more confidence in the market, attracting more investors and boosting prices. Additionally, precise regulation minimizes uncertainty, stabilizing the market and reducing significant price fluctuations
- If the government imposes stringent regulations on the use and trading of cryptocurrency, it can lead to less activity in the market, pressurizing prices to drop
- Also, if governments support the use of cryptocurrency as an investment vehicle, major financial players may be encouraged to enter the market, increasing prices
Comprehensive regulations governing the crypto market can raise the cost of holding digital coins, diminishing their price performance.
3. Market capitalization
Market capitalization refers to the total value of a crypto, determined by multiplying the current price of a single coin by the total coins in circulation. A high market cap often implies that a crypto is popular, trusted, and widely used, increasing its stability as its price isn’t likely to change significantly with small trades. Cryptos with a high market cap are usually more stable because they have a substantial market presence and increased liquidity. This means unexpected price changes less influence these coins.
Cryptos with a large market cap, including Ethereum and Bitcoin, usually experience minor price swings as they have many sellers and buyers, minimizing the possibility of manipulation. Conversely, cryptos with a smaller market capitalization are more volatile and may experience significant price changes with small trading volumes. This makes them riskier but with the possibility of more short-term gains.
4. Node count
Node count shows the number of active wallets in a particular network to help you determine a community’s strength. The higher the node count, the stronger the community, which boosts the possibility of a crypto withstanding a possible crisis. A high node count suggests that more people interact with a specific crypto. Often, crypto price rises are preceded by a surge in node count.
5. Competition in the crypto market
The crypto market is quite saturated, and new or upcoming coins are being introduced, increasing competition. If investors feel that a new digital coin has potential, their interest may shift, leading to a decline in demand for the well-known cryptos. Although Bitcoin and other popular coins have secured high spots, their prices might rise or take a dip depending on the performance of different cryptos.
Endnote
Crypto prices are volatile and are usually influenced by several elements. Familiarize yourself with the factors that affect cryptocurrency prices to ensure profitable crypto trading
