Have you noticed that the different cryptocurrencies have drastically different values? Some cryptocurrencies are priced at thousands of dollars per token, whereas others are worth practically nothing. Knowing some of the factors that influence the price of cryptocurrency most can help demystify it and make it easier for you to understand what’s going on.
Supply vs. Demand
Just like any commodity, the value of cryptocurrencies are based on supply and demand. If demand is high and supply is low, the price of a cryptocurrency will be high. On the other hand if supply is high but demand is low, the price will be low instead.
The demand for a cryptocurrency is tied to factors that affect its popularity. Similarly the supply of a cryptocurrency is based on factors that affect its production.
Cost of Production
Many cryptocurrencies are produced by ‘mining’, and have a limited supply. It is normally more difficult to mine the cryptocurrency as time goes by, and the cost of production will increase.
Of course not all cryptocurrencies are mined, and some are produced in other ways. Regardless, the general rule is the same: If the cost of production is high – the supply will be dearer, and the price will probably be higher.
Although Bitcoin’s influence may no longer be what it once was – it is still the most prominent cryptocurrency by far. Because of that the price of all cryptocurrencies are influenced by its price – for better or for worse. That is why you need to keep an eye on the price of Bitcoin, even if you don’t intend to trade Bitcoin directly.
In the last few years new regulations are constantly being mooted that affect cryptocurrencies in various ways and directly influence their price. For example, regulations that curtail the freedom to trade or develop cryptocurrencies may cause prices to drop.
Similarly, any move to ban cryptocurrencies in a jurisdiction can have a devastating effect.
Although there are thousands of cryptocurrencies out there, many have little or no value simply because they do not bring anything new to the table. Many are ‘knock offs’ of other popular cryptocurrencies – such as Bitcoin. Without a unique utility, a cryptocurrency won’t be able to set itself apart and its price will stagnate or gradually deteriorate.
News about Current Affairs
News about current affairs can heavily affect cryptocurrency prices. Any negative news about cryptocurrencies or hacks of cryptocurrency exchanges can result in a panic that reduces prices across the board.
Conversely, news about instability or economic uncertainty could make cryptocurrencies more popular in specific regions. That is because they are often seen as a safer option compared to traditional currencies that are government-linked.
Keep in mind that in addition to the factors listed above, there are many others that can affect the price of cryptocurrencies. That is why at times it may not be easy to identify why the price rises or falls, or predict how a factor will influence it in the future.