Whether you’re new to cryptocurrency or you have some trading experience, understanding and being able to read the markets can be incredibly difficult. Like all markets, from centralised currencies and other securities to assets and properties, the price of cryptocurrency fluctuates based on a large number of factors. However, when it comes to cryptocurrency, these variables can differ wildly from those that determine the price of more traditional currencies, securities and assets.
So, if you’ve ever wondered just what factors determine the value of cryptocurrencies and what variables make these values go up and down, keep reading. In this post, we’ll take a deep dive into cryptocurrency price fluctuations and explore what you should be looking out for when it comes to rising and falling values.
How does the value of cryptocurrency change?
As you may know, traditional markets, like those mentioned above, react to what’s going on in the world at a certain time. This means they fluctuate based on a broad range of factors including domestic and international inflation rates, interest rates, general economic performance and political events. However, cryptocurrency markets are not affected by these variables in quite the same way. Instead, the value of these digital currencies, which includes the likes of Bitcoin, Dogecoin and Ethereum, is determined by a series of internal factors and external factors.
As completely decentralised forms of currency with markets that are open 24 hours a day, seven days a week, to put it in its most simple terms, the value of cryptocurrency changes based on supply and demand. This is to say, when a larger number of people want to buy into a certain currency, the price will naturally increase, while when demand is low, prices will drop. While this might sound basic on the face of it, understanding the individual internal and external factors that actually cause demand to rise and fall is more challenging. However, this is the key to being able to better understand why the value of cryptocurrency is so volatile.
Internal factors that can cause the value of cryptocurrency to change include:
– The actions of traders
When middle-sized and major traders buy or sell in quantity, market value will react accordingly.
– Crypto competition
When the price of one cryptocurrency increases, say Bitcoin, for example, the price of competing cryptos, e.g. Ethereum, Dogecoin, etc, is likely to drop.
External factors that can cause the value of cryptocurrency to change include:
– Media influence
Both positive and negative mass media coverage, particularly coverage from influential figures and platforms, influences how people perceive cryptocurrency and can subsequently impact value.
– Mainstream acceptance
If people, companies and shops start to accept a certain crypto as a legitimate form of payment, demand and value is likely to increase. If they reject a crypto, demand and value will drop.
– Trade marketplace acceptance
When a legitimate trading platform starts accepting a new cryptocurrency and makes it easier for it to be traded, its legitimacy increases. This can increase demand and value. Again, if a crypto is rejected by a trading platform, its value is likely to suffer.
– Political intervention
If a political decision impacts how a crypto can be used, price will naturally be affected. For example, when China announced a ban on all initial coin offerings (ICOs) for cryptocurrency in 2017, the global price of digital currencies tumbled.
How does cryptocurrency gain value?
As discussed above, traders are motivated to either invest or sell cryptocurrency based on how they perceive the value of the digital currency at a specific time. This means, in order for a cryptocurrency to gain value, it must display potential in the form of a positive scale of community involvement. This is to say, it is in demand in relation to the currency’s relative scarcity and has good coin utility – the ability to use it easily, both in terms of user platform and places that accept it as a legitimate form of payment.
Although a cryptocurrency’s perceived value can be highly volatile, and easily impacted both positively and negatively by a combination of the internal and external market-driving factors mentioned above, the bottom line is that cryptocurrencies gain value when people and organisations use and accept it as a legitimate form of payment. However, this is much easier said than done with such a volatile security like cryptocurrency, and many factors can just as easily cause the value and reputation of a digital currency to drop rapidly.
Why does cryptocurrency drop?
Although there are many factors that can affect the rise and fall of cryptocurrency value, some of which we have looked at already, there are a number of additional factors that can see the value of cryptocurrencies drop in the blink of an eye. These include:
– Sudden fear, uncertainty, and doubt (FUD)
Typically triggered by negative media coverage, FUD can cause crypto holders to panic, lose faith and sell their coins short of their actual value. If this gains traction and people sell en masse, markets can suffer and cryptocurrency value can drop rapidly.
– Coin dumping
If a large amount of a certain cryptocurrency is reintroduced into the market at one time – for example, after great quantities are seized from illegal operations by the authorities and auctioned off back into the market – prices naturally fall as supply is increased.
– Poor platform/software management
When a crypto platform suffers from technical difficulties, or if there is a glitch or error in the software, traders can lose confidence in the currency and sell. This famously happened in December 2013 when Bitcoin users had trouble withdrawing money from the exchange.
Are you looking to learn more about cryptocurrency and maybe even invest? To discover how AltSignals can help you become a successful crypto trader, click here.
