Cryptocurrencies are all the rage right now. The astronomical price increases of Bitcoin and Ethereum in 2017 made it abundantly clear that there is a lot of money to be made in this industry. But what determines the value of a cryptocurrency?
This question is much more complicated than it seems on the surface, and there are a variety of factors that contribute to price fluctuations. In this blog post, we will explore some of the most important determinants of cryptocurrency value. By understanding these factors, you will be in a better position to make informed investment decisions. So let’s get started!
The role of supply and demand in cryptocurrency valuation
To put it simply, the price of any good is determined by supply and demand. Supply refers to how much of the good is available for purchase or exchange, whereas demand refers to how much of that good people want to buy. Cryptocurrencies are no exception to this rule. It makes intuitive sense that if there are very few units of a cryptocurrency available, and a lot of people want to buy it, then its price is going to be high.
The supply of cryptocurrencies is usually fixed. That means that once all the units of a particular cryptocurrency have been mined or released into the market, there isn’t going to be any more coming in. This is advantageous for sellers because it ensures that the supply of their coin will not increase and drive down the price.
For example, Bitcoin only has 21 million units available for purchase or exchange. This is done in order to prevent inflation. In other words, this fixed supply ensures that there won’t be any more Bitcoins flooding the market in response to price increases. And because only a finite number of units will ever be available for purchase or exchange, it is likely that prices will continue to rise as demand increases over time.
The opposite is also true: if there are too many units of a cryptocurrency available and not enough demand, then the price will go down. This is why some cryptocurrencies have tried to find alternative methods of distribution or control more tightly how many units are released over time.
How speculation affects the price of cryptocurrencies
Speculation refers to the act of buying things in anticipation of future price increases. Think about what happened with Bitcoin in 2017 for example: enormous amounts of speculation caused the price to skyrocket.
The problem is that when you have an asset whose value has no real basis in physical properties, then ultimately all that determines its value is perception and expectation; the expectation that the price will go up. When everyone starts believing in a cryptocurrency, then they will buy it and drive prices higher, but when the public loses faith in a coin, then its value will plummet.
Speculation can create extremely volatile market conditions where large price swings can happen in a short period of time. This can be dangerous for investors who are not prepared to lose everything, but also rewarding if they are able to buy when prices are low and sell when prices are high.
The impact of media coverage on cryptocurrency prices
Media coverage is important for cryptocurrencies because it goes back to the issue of perception again. If a particular cryptocurrency gets good press, then more people are likely to buy in because they have faith that this coin will be successful.
Additionally, even when there isn’t any good news about a coin or token, just being talked about in the media drives up prices because more people are interested. And when prices are rising, it triggers more good press because the media wants to talk about price movements that are making people money.
That’s why it’s very important for crypto traders to find relevant sources of information of crypto news and try to predict how these will affect the market. Specialized websites such as cryptonews.com can be a great place to check the overall sentiment towards a certain cryptocurrency in the media.
The importance of community in determining the value of a cryptocurrency
This is another area that makes cryptocurrencies unique. The price of a cryptocurrency is determined by how many people want to possess it, but also by the extent to which participants are willing to work together in order to make the project successful.
Cryptocurrencies are decentralized, which means that there isn’t any one company or organization (central authority) controlling them. Instead, decisions are made through consensus and everyone who is part of the community has a say in how things go.
This is both a blessing and a curse: it means that different people will be arguing over how to develop the technology and which direction to take the coin, but it also increases the chances that participants will try hard to make their coin a success.
Government interventions and new regulations can affect cryptocurrency value
Cryptocurrencies are still in their infancy and governments are still trying to figure out how to legislate them. When a government announces that it plans to regulate cryptocurrencies, this can cause the price of those coins to go up or down because investors are trying to guess what the new regulations will be.
For example, when China announced that it was going to ban all cryptocurrency trading, the price of Bitcoin and other coins immediately went down because investors were worried that they would no longer be able to trade them.
However, this also creates opportunities for investors who can anticipate which countries are likely to introduce new regulations, and then buy into related cryptocurrencies ahead of time.
All of these factors affect the value of a cryptocurrency, but ultimately they all come down to one thing: whether or not people want to own it. If a lot of people believe in a coin and are buying it, then prices will go up regardless of anything else.
Anybody who has a strong interest in cryptocurrencies should be looking at several different factors when trying to understand the price movements of different coins, not just one or two of them. The more information you have about how prices are determined, the easier it will be to make smart investments in this space.