Even though the cryptocurrency market has existed for a while, it is still linked to high volatility, gains and losses in a single day, and other things that make it hard to predict. There are some factors influencing cryptocurrency values. Every day, new cryptocurrencies are created. In 2022, Bitcoin’s market capitalization dropped by about $150 billion in 24 hours, while a single tweet sent Dogecoin’s value up by over 17%.
When things like this happen, retail traders wonder if it’s possible to predict price changes in cryptocurrencies by keeping an eye on the same things that affect other financial markets, like forex, commodities, or stock indices. Yes and no are both correct answers to this question. Some of these things also affect the crypto market, but others only happen in the crypto market, affecting how prices move.
Factors influencing cryptocurrency values
1. The Supply and demand system
How can the law of supply and demand predict a cryptocurrency’s price changes? The number of cryptocurrencies in circulation at any time determines how many are available. So, more coins in circulation mean more than people want, which decreases the price.
On the other hand, when the demand for a cryptocurrency is higher than its supply, its price goes up and can keep going up until the store goes down.
2. Production costs
This is one of the factors influencing cryptocurrency values which considered most important. Making a product or service is a big part of how much it costs, and cryptocurrencies are no different. First, though, let’s look at how cryptocurrency coins are made. Mining is the process of verifying crypto transactions on the blockchain to make new cryptocurrency coins. The miners’ network is essential for creating new crypto coins, maintaining the blockchain, and making decentralized cryptocurrency work.
Miners need potent processors and electricity to be successful, which raises their investment costs. Miners will only use their time and money to make cryptocurrencies if the final reward is enough to cover their costs and give them a profit. In other words, miners can only make money if the value of cryptocurrencies is high enough. This is because the cost of making them affects their value.
There are a lot of cryptocurrencies on the market, and new ones are added daily. This increases competition in the market. If traders think that a new or soon-to-be-released cryptocurrency has potential, their demand could change, causing the prices of the most popular cryptocurrencies to drop.
Even though Bitcoin and Ethereum are two of the most popular coins, their prices could go down or up depending on how other coins do. Also, the costs of the most popular cryptocurrencies could also affect the prices of other cryptocurrencies.
4. The Market Conditions
Traders tend to avoid risky investments and turn to safe assets like gold, the US dollar, or the Japanese yen when times are uncertain or when inflation is high. If this happens, traders, in particular, might decide to sell or not invest in the volatile and challenging cryptocurrency market. Prices could change because of the drop in demand.
5. Availability on the exchanges
A cryptocurrency exchange allows you to trade your cryptocurrencies for other digital currencies or regular money. How much cryptocurrency is bought or sold in a business depends on whether or not it is available there. This affects how its price moves. Many exchanges sell popular cryptocurrencies, but smaller coins may only be sold at a few places.
In this case, traders who want to trade a popular cryptocurrency for a less common cryptocurrency will have to do multiple exchanges and pay a fee each time. For example, a trader wants to swap Avalanche for Polkadot but can’t find a place to do so that has both cryptocurrencies.
He will have to pay a fee to change Avalanche into USD at one exchange. Then, he will have to pay another business a fee to change the USD into Polkadot. This doubles the trader’s investment costs and could make him less likely to buy, which could affect the price in the future.
The cryptocurrency market is unrestricted and has no central point of control. Since it has become more popular, governments worldwide have talked about ways to control it or tax the money people use to cash it out. Any news from the government is likely to affect demand and investment, which could cause cryptocurrency prices to change.
7. Social media
Social media and online forums have also significantly affected how the prices of cryptocurrencies change. Social media has become the best place to find out what cryptocurrency influencers think and for updates on the blockchain. Since it affects how the public thinks, it also affects how traders feel about the current market situation and their decisions to buy or sell, which affects demand.
In this case, cryptocurrency’s price is also affected by how much demand goes up or down. Even though the price of a cryptocurrency is likely to change, there are some things you can do to make an informed decision before you trade. But none of these things can predict how prices will move.
A safer way to avoid Factors influencing cryptocurrency values and to devise a crypto trading strategy is to try out different options to see which one works best for you. To get better at trading crypto, you should know about all factors Influencing Cryptocurrency Values and practice virtual money in a demo account and keep these things in mind before you start trading with real money.