What Affects The Price of Cryptocurrencies?

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graph showing the price of cryptocurrency

What Affects The Price of Cryptocurrency?

The prices of cryptocurrencies, like any other asset class, are driven by a multitude of factors. Cryptocurrencies are known to be volatile. One of the most common influences on the price of cryptocurrencies is speculation by investors. When investors become bullish about a certain cryptocurrency, it drives up demand and therefore price. On the flip side, when news arrives that causes investors to become bearish about a particular cryptocurrency, then price drops accordingly.

Other factors such as government regulations, technological innovation, monetary policies and supply-demand can also have an effect on price movements of cryptocurrencies.

To have a better understanding why prices move a certain way traders must consider both present conditions and future expectations to gauge price dynamics accurately.

Here is a non-exhaustive list of factors that influence cryptocurrency price movements.

Supply & Demand

At a basic level, the price of cryptocurrencies will be driven by its availability. The scarcer a digital coin is, the higher its price levels. In contrast, a virtual currency with an abundant supply will likely experience lower price levels.

Mining Difficulty

In the case of proof-of-work blockchains such as Bitcoin, the mining difficulty of a coin can also have a direct relationship with its price. A higher mining difficulty means that it is harder to mine an additional unit of a coin. This can have an impact on a coin’s perceived value, and subsequently its price, as increasing a coin’s supply will require more computing power to be used in the mining process.

Utility

A key factor that will affect the price of cryptocurrencies is its perceived utility. A virtual currency that possess no practical use will likely be viewed as having no value, which may be reflected with lower market price levels. For example, Ether’s price movements can be attributed to its perceived practical utility, that being a user’s ability to build and launch their own decentralized applications on the Ethereum platform.

Market News

Market News can also affect the a coin’s price movements. Positive or negative news reporting can be a heavy influencer of general market sentiment regarding a particular coin. Media reporting about a network hack for example is likely to drive prices down, whereas, coverage about a coin’s increasing adoption can result in positive market sentiment that drives a coin’s market price upward.

 

First Published: 20 September 2017

Last Updated: 1st January 2023