Cryptocurrency is one of the most revolutionary financial systems of the digital era in this century. Developed by Satoshi Nakamoto in 2008 as a decentralized digital currency that operates on blockchain technology, cryptocurrency is not backed by any central authority – the way paper money is backed by traditional banks – and therefore, very volatile. Several factors determine the price value of cryptocurrencies and we will review some of them:
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Market Forces Of Demand And Supply
The first-ever and most-priced cryptocurrency is Bitcoin – currently priced at about $20,428 per 1 BTC. The fact that it is projected to stop being mined in 2140 with a total of 21 million coins produced makes it a very limited cryptocurrency; and the additional fact that Bitcoin is created nearly every four years drives up its value. You must understand that scarce resources usually have high price values, and this triggers market forces of high demand and limited supply.
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Production Or Mining Costs
Mining cryptocurrencies take time and many powerful resources. Companies and groups of dedicated miners often compete to mine new digital currencies by solving complex algorithmic equations – committing powerful computer resources, superfast internet speeds, and constant electricity to the task. The first miner that solves the mathematical problem is rewarded with new cryptocurrency and transaction fees that accumulated since the last mining was done. This production cost drives the price of cryptos.
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Cryptocurrencies Competition
There are several cryptocurrencies vying for acceptability in the market; these include Bitcoin, Ethereum, Litecoin, Dogecoin, Kucoin, Ripple, and Monero among others. With new tokens or coins being mined every day and coupled with other market situations, the price of competing cryptocurrencies will go up.
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Availability On Exchanges
Major cryptocurrencies are available for investors on multiple exchanges – increasing their availability and reducing swapping fees – thereby dropping their price value. But in a situation where you have to swap a cryptocurrency token across several exchanges, the exercise will increase their price since you will be charged fees for each swap across exchanges.
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Government Regulations
Just like anything else, government regulations can influence demand, supply, and applicable prices. The price of Bitcoin rose to $69,000 in October 2021 after the Securities and Exchange Commission (SEC) approved it; but in countries where it is banned or high tax is set on cashing out tokens with fiat money, the price will be significantly lower. As it is, cryptocurrency is banned in several countries including China, Egypt, Qatar, Bangladesh, Morocco, and Algeria among others.
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Social Media
Social media has a big influence on the prices of cryptocurrencies. When any social media influencer or famous personality makes comments regarding cryptos, it can drive up or drive down their prices. A good example is Tesla and SpaceX CEO, Elon Musk, whose comments have driven up the price value of Dogecoin on many occasions. The way the crypto market is portrayed in the news influences people’s opinions – creating over-excitement or frenzied panic – and price fluctuations.
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National Key Events
Any political, economic, and market situation can affect the price and value of cryptocurrencies. Political instability, economic setbacks, security breaches, high inflation, and regulatory oversight among others can influence the price of cryptocurrencies. Social crisis and any forms of upheavals in the country can impact people’s ability to trade or perform payment transactions using cryptocurrency, thereby affecting the prices of the digital payment system.
Final thoughts…
Financial experts agree that cryptocurrencies are very volatile and subject to swift changes. They advise that it is best to speak to a finance and investment consultant before investing in cryptocurrencies. You can only invest in cryptocurrency by buying the shares of companies that invest in cryptocurrency and blockchain technology. And you are advised to invest only the money you are willing to lose.
Having understood the factors that determine price changes in the values of cryptocurrencies, it is your choice to determine how to proceed with buying and selling cryptos. You may buy portions of a crypto instead of buying in bulk – meaning that you can buy $25 worth today and then $30 worth tomorrow and then $85 worth next week.
You must also ensure that your cryptocurrency is stored in a trusted and secured wallet that cannot be breached; if you lose your mobile device or your wallet app is compromised in any way. Having any of these will result in the loss of all your cryptocurrencies.