Introduction: Factors That Determine Price
The question of the factors that determine the prices of digital assets has always weighed on the mind of outsiders or newbie cryptocurrency investors. To the untrained eye, cryptocurrency prices are determined randomly but this is not the case. There are several factors that affect the price of crypto assets in the markets and this piece will shed a light on them.
Understanding these factors will help traders navigate the uncertainties of extreme volatility that are inherent in virtual currencies and make smarter trading decisions. Digital assets can enjoy bullish seasons of soaring prices in one week, and go through the pangs of rapidly declining volumes during the next week.
Keeping up with the chaos is difficult, which is why experts use a coin price tracker like CoinStats to monitor the changing prices of their assets from one intuitive dashboard. CoinStats supports over 5,000 cryptocurrencies and over 400 exchanges including market leaders like Binance, FTX, and even lesser-known exchanges.
Factors affecting Cryptocurrency Prices
Here are some of the biggest factors that affect the price of virtual currencies in the markets.
1) Technological Advancements
Cryptocurrency prices are often determined by the technological advancement made by the team. Announcements of groundbreaking innovation have a long, storied history of sending prices on a rally while redundant blockchains record the sinking of their native token.
Bitcoin’s Segregated Witness (SegWit) of 2017 and the Taproot upgrade both played key roles in the asset class setting new all-time highs. Ethereum (ETH) became the second-largest cryptocurrency because of the innovation of smart contracts. Decentralized finance (DeFi) and decentralized applications (DApps) made use of smart contracts as their building block in the Ethereum blockchain.
Newer blockchains like Solana (SOL), Polkadot (DOT), and Avalanche (AVAX) have recorded a growth spurt in their values over the last year by showcasing technology that has been touted as being superior to Ethereum, earning them the moniker of ETH-Killers.
2) Inflow and Outflow of Capital
Like traditional markets, virtual currency prices behave in the same way when there is an increase in the inflow of capital. The market capitalization of the industry spiked to nearly $3 trillion propped by the massive inflow of funds from both retail and institutional investors.
Large public companies like Tesla and Microstrategy held BTC running into billions on their balance sheets while the number of Bitcoin addresses notched higher figures. On the flip side, the flight of capital by investors to other markets is a sure-fire way for prices to fall. Oftentimes, savvy investors are drawn to projects regularly making upgrades to their network to expand their use cases.
3) Regulatory Control
Cryptocurrency prices are affected by government policies and the actions of regulators. Generally, reports of a positive stance toward cryptocurrencies by the government would send virtual currencies on a bullish run. There are several instances where this theory holds water such as the U.S. decision to launch Bitcoin exchange-traded funds (ETFs).
Reports of China cracking down on the industry has traditionally sparked fear and uncertainty in the markets, culminating in a major ban in the summer of 2021. The effects of such bans left a negative effect on crypto prices that wiped billions off the holdings of investors.
Legislation like a mining moratorium in New York or the decision to adopt Bitcoin as a currency in El Salvador has elicited diverse price reactions from the markets. Investors in virtual assets have to pay attention to the activities of regulators before making their next move.
4) Cryptocurrency exchanges
One of the major ways cryptocurrency prices are determined is the role played by exchanges. The listing of a virtual asset on a leading cryptocurrency exchange has the ability to increase the valuation of an asset.
The reason for this is not far-fetched because a top exchange with millions of users means a virtual currency can have a high number of investors. This makes it easy for investors to access the token leading to an increase in valuation.
The phenomenon has been tagged the Coinbase effect and has been studied by experts. One report noted that digital currency valuations spiked by an average of 20% immediately after securing a listing on Coinbase or Binance. Swapping assets involving two or more exchanges are another example that involves the payment of a fee and could play a role in the valuation.
5) Miner Activity
Mining virtual assets like BTC and ETH are energy intensive and cost a small fortune. Around the world, miners have splurged thousands of dollars to set up mining facilities with the hardware and electricity costs sending asset prices through the roof.
Miners have to be compensated for their roles in securing the network and if token prices do not allow them to break even, there will be no incentives to mine more assets. It is unsurprising that the two largest cryptocurrencies by market capitalization are the ones with the most cost-intensive mining setup.
Bitcoin mining hardware like the Antminer S19 Pro costs northward of $5,000 and GPU mining scarcity globally has sent prices through the roof.
6) The role of social media
Social media and crypto prices work in tandem. Influencers like Tesla’s CEO, Elon Musk have demonstrated an ability to send prices soaring by sharing memes about a virtual currency.
Dogecoin’s meteoric rise that saw it climb by over 2,000% in a few months was partly a result of the support it got from Elon Musk. Musk and Dogecoin went all the way to have an appearance on Saturday Night Live.
Reports of a lucrative partnership, upgrades, or celebrity endorsement are often bullish for prices while hacks and lawsuits could spell doom for cryptocurrency prices.
There you have it! The factors that influence Cryptocurrency prices. Bear in mind that these factors are not exhaustive and their combination might lead to wild bouts of volatility.
As a recap, the activities of promoters, the cost of mining, regulatory activity, the flow of capital into projects, and technical upgrades have strong effects on the prices of digital assets. Now, you’re armed with the knowledge that can possibly improve your trading journey. Make it count!