Unlike fiat currency, cryptocurrencies are not backed up by financial institutions but are traded like commodities. The demand and supply of cryptocurrency mainly influence its value. The link between demand and supply determines the asset’s price.
If the demand for a crypto coin is high, but the supply is limited, the prices will increase. Let’s read more about supply and demand and other factors that can influence the price of a cryptocurrency.
Supply and Demand
Supply and demand are among the main factors that have an evident effect on the price. The price increases when the coin has a limited supply or high demand. Conversely, lower demand and an ample supply can cause the price to fall.
According to the theory of supply and demand, most commodities are produced more when the demand rises. However, in the case of cryptocurrencies, there’s a limit or a maximum supply, which can cause a significant price hike as the coin reaches its maximum supply and the demand is still increasing.
Maintaining a max supply is crucial to keep the crypto coins valuable, reduce unnecessary inflation, and minimize loss.
Production Cost
Although most cryptocurrencies have a maximum supply, the coins are generated through mining. Powerful computers are used to verify blocks on the blockchain. A block can only be verified when one of the computers can solve a complex problem.
When the mining competition is high, miners find it more challenging to generate coins. The time required to mine increases, which means more resources and manpower will be required to mine.
These changes can ultimately affect the price of the crypto asset. The production cost, supply and demand, type of exchange, regulations, and competition will determine the price of any cryptocurrency. The swings in price can be minimal or astronomical depending on the impact of each of these factors, influencing the Ethereum price and other digital assets.
Competition
After the launch of Bitcoin in 2009, the crypto industry has seen a boom in adding new cryptocurrencies. Thirteen thousand cryptocurrencies have been launched, flooding the market with many options.
However, not all crypto assets are viable and capable of building a stable crypto network. The currencies with a viable blockchain application can build a network more quickly than their competitors. When a currency gains traction, it automatically increases in price while reducing the price of its competitors.
Crypto Exchanges
Due to their simplified usage, most people prefer using crypto exchanges to trade and invest in cryptocurrencies. While every exchange lists popular cryptocurrencies like Bitcoin and Ethereum, smaller or relatively newer currencies are only limited to a few small exchanges.
This limited availability decreases the asset’s access to the mainstream market, influencing the price to stay low. Likewise, if the same cryptocurrency is listed in several exchanges, more investors will interact, increasing the currency’s chances to gain traction and value.
If the currency’s value is already low, is thinly traded, and has a high cost of trading, the price will eventually fall.
Network Improvements
There’s no set of definite rules that structures crypto networks. The rules and regulations change according to the likings of the community and the way they are interested in trading and investing in the coin.
Investors prefer a stable crypto network that is updated accordingly by the developers for improved functionality.
If the devs of a cryptocurrency take a lot of time to roll out a software update, it can decrease the currency’s value. Developers constantly use coin burning to keep the inflation rates, the demand, and the currency’s value stable.
Community Strength
Every crypto coin has a community that trades, invests, and supports the coin. This strength is known as node count. The node count shows the number of active wallets on the same network.
The larger the node count, the stronger the coin’s value. You can compare a popular coin with a smaller one to understand the relationship between the node count and a currency’s value.
Regulations
Although many governments and financial institutions have accepted crypto trading, the regulations must be clarified.
This lack of adequate regulations makes the crypto market volatile. These regulations can either increase or decrease the currency’s value, depending on whether the regulation is in favor or against the currency.
Economic Conditions
Inflation, unemployment, and high-interest rates can affect the crypto price. During these conditions, the people’s spending power decreases, making it difficult to sustain their investments.
In 2021, cryptocurrencies like Bitcoin were valued the highest but quickly decreased as talks of an economic downturn started.
These conditions make people anxious and divert them from risky investments like crypto, where careful planning and execution are crucial.
Likewise, the increasing security concerns over the last few years have made the crypto industry an unsafe option. Crypto exchange crashes and increasing crypto scams continuously affect the crypto investment market, ultimately affecting the price.
Increased Fear
Increased hype and fear among investors are other factors that affect the crypto asset’s price.
When the market is booming, the hype created makes investors invest more, increasing the demand and value. However, due to the market’s volatility, several investors backing out and selling their coins can make the price fall.
Media Coverage
The attention media gives to the crypto industry has a massive effect on its price.
The media portraying influential people getting into crypto or quoting the industry as a regulated investment platform can stabilize the crypto asset’s value. In contrast, if the media coverage is negative, it will only lead to a price drop.
Increased Utility
The adoption of crypto for business transactions and utility can impact its price and value. Many businesses and companies in Europe and worldwide have accepted this decentralized system and are using these assets for their transactions.
Crypto Hacks
Whether keeping your crypto investments in an exchange or using a hot wallet to keep the assets safe from prying eyes, staying away from crypto scams is still difficult. Now and then, a new way of crypto scamming and hacking emerges, making it extremely difficult for new investors to trust the system and make an investment.
Increased Adoption
If more people adopt the currency, its demand and price will increase. This mostly happens when the applications of an existing coin increase on the blockchain, increasing its value.
Maximum Supply
Many cryptocurrencies have their own set of rules and limitations.
Some currencies have a maximum supply, whereas others don’t. However, coins with a finite supply directly influence the asset’s price. For example, Bitcoin has a maximum supply of 21 million, of which only two million are left to mine.
This keeps Bitcoin’s value stable as the demand keeps increasing. In contrast, Ethereum is another popular coin but doesn’t have a maximum supply, making its value lower than Bitcoin’s.
Conclusion
While the cryptocurrencies value depends on the above-mentioned factors, the main driving factors are supply and demand. The larger the community involvement and investment size, the more stable the currency.
When the demand exceeds the supply, the price increases. Similarly, when a currency’s utility increases, its value improves. Lastly, stable regulations by the relevant authorities make investors hold on to their investments.
The longer they hold their investments, the more stability the market gains. However, the volatile nature makes most investors bail out.
We hope the information presented here can broaden your understanding of cryptocurrency’s value and its influencers.
