If there is one trait that all cryptocurrencies seem to share it is that their price can be very volatile. Not only does it fluctuate on a regular basis, but it also sometimes drops or soars for no apparent reason.
Regardless of whether you’re planning on investing in cryptocurrencies or just want to know more about them – you should start by understanding the factors that affect their price.
Law of Supply and Demand
The main factor that affects the price of any cryptocurrency is the law of supply and demand. To put it simply the higher the demand and the lower the supply, the more the price will be. Conversely if the demand is low and the supply is high, the price will be less.
Unlike conventional currencies, the supply of cryptocurrencies is limited. On top of that the growth of supply starts to slow down over time, which means that the demand is highly likely to exceed the supply.
At the same time the demand for cryptocurrencies can vary significantly as well. It is affected by several other factors that are often specific to the cryptocurrency in question.
The production of cryptocurrency requires for it to be ‘mined’, and that can become more difficult over time. If it is more difficult the cost to produce a single token will be higher, which will invariably affect the price of the cryptocurrency as well.
Although some cryptocurrencies are structured differently, in general the production cost steadily increases as time goes by. That is because the rate of mining becomes lower, and the competition between miners will probably start to become more intense.
Regulations and Oversight
One factor that often has a large influence on the price of cryptocurrencies are new regulations or oversight requirements that are put into place. In some cases that influence is positive, but in others it is not.
At the end of the day it all boils down to the type of regulations that are implemented. If they are too restrictive or take the form of a crackdown, the price of the cryptocurrency could plummet. On the other hand if they are more positive, they could become the catalyst that makes the price rise.
Coverage of cryptocurrencies in the media can definitely sway the sentiment of investors, and affect the demand. If the news is positive it could help the price to rise, whereas if it is not then it will drive it down.
It should be noted that the media can play a positive role indirectly as well by informing and educating viewers regarding cryptocurrencies. The greater the understanding of the general public, the more demand there will probably be.
Politics and other types of current affairs frequently affect the price of cryptocurrencies. That is especially true of any events that make people lose faith in their government or economy, in which case buying up cryptocurrencies as an alternative may look like a safer option.
Although some experts have posited that cryptocurrencies may eventually replace physical gold as a ‘safe haven’ asset – it is a long way from that due to how volatile it can be. That being said when current affairs are rocky it is increasingly being viewed as a good alternative.
It should be noted that although there are other factors that can affect the price of cryptocurrencies. On top of that at times the price has been known to fluctuate for no specific reason at all – or at least, none that can be identified.
Suffice to say if you’re hoping to predict the price on a crypto exchange – that is a lot easier said than done. At best you will be able to use the factors listed above to try to predict the direction in which the price will trend, and then make decisions based on that.