Factors affecting cryptocurrency value and price

Factors affecting cryptocurrency value and price

  • 26 January 2022
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What influences cryptocurrency value? The first thing that comes to mind is demand. The higher the demand, the higher the price and vice versa. For cryptocurrency, several factors influence how the price fluctuates, and in this article, we’ll take a closer look at Factors affecting cryptocurrency.

Factors affecting cryptocurrency: Determining the value of crypto

While it’s easy to conflate crypto with bitcoin, there are actually around 4,000 such currencies in circulation around the world, more than the number of fiat (government-issued) currencies in existence. The number of cryptos is likely to keep growing, largely because it’s so easy to develop a new coin, which in basic terms is simply computer code generated by open-source software designed to transact value online.

The way a coin will develop, and for what purpose, has a massive bearing on its value. While there are thousands in existence, the top 20 coins will believe to constitute around 99% of the market by volume, according to crypto website CoinDesk.

Much like fiat currencies, the price of cryptocurrencies heavily swayed by supply and demand. But it will also determine by the cost of production. “Look at the use case of a coin,” says Edward Cooper, Revolut’s head of crypto. He emphasises utility as the most important component in a cryptocurrency’s value. “How much technical engineering is going on to update the protocol? What is the calibre of the founding team?”

For Bitcoin, that utility is solving the problem of wealth storage, while Ethereum, the world’s second-largest cryptocurrency, can be used as the foundation for apps. This compares to dogecoin, which was created in just two hours as a joke and enjoyed a nearly 20% value boost when Musk tweeted: “One word: Doge.”

Factors affecting cryptocurrency: Determining the value of crypto


Doge doesn’t pass some of the utility tests, says Cooper. “The value here comes from speculation.”

Retail investors should remember that bitcoin is a limited supply asset, with a 21 million cap written into its source code. This is why it acts as an effective store of value. Not all cryptocurrencies have a cap. Ethereum doesn’t – and neither does dogecoin.

However, a cap is not the only way to hedge against inflation. Ethererum, for example, has a set number of monetary policies, including a fixed supply and issuance schedule, to keep its value constant. As long as demand outweighs supply, its price will keep going up. Tether, one of the best-known stablecoins, is pegged to the US dollar to anchor its value.

What are the Factors affecting cryptocurrency?

  1. Node Count

The node count shows how many active wallets exist in the same network. You can easily find this information by simply making a Google search or checking the currency homepage.

But how is node count important? First, it shows you how strong the community is. A high node count is proof of a strong community, and a strong community increases the chances for that currency to overcome a potential crisis. Second, a large number of nodes can also indicate the strength and decentralization of a network, both important factors when it comes to crypto.

Note: You can check if a cryptocurrency is priced fairly using the node count. Take a look at the currency’s node count and total market capitalization and compare them with a more popular currency. Using this method isn’t entirely accurate as network infrastructure differs, but it at least gives you an idea of how cryptos operate and how node count can influence price.

  1. Production Cost

The production cost is another Factors affecting cryptocurrency value. Every day, miners use specialized hardware or servers to produce new tokens and verify new network transactions. Miners are rewarded with virtual tokens and a network fee for their efforts.

The miner’s network activity allows decentralized cryptocurrency to keep working. So, if mining costs increase, the cryptocurrency value may also increase. It makes no sense for miners to spend their resources mining new cryptocurrency tokens if the rewards are not big enough to cover the expenses and bring them profit. However, this isn’t always the case and isn’t uniform across all cryptos, so make sure to research before committing.

  1. Crypto Exchanges

If a token is available on a large number of crypto exchanges, it increases the number of people buying and using that token. If you need two or more exchanges to swap any cryptocurrency token, you will pay a fee for each swap, raising the investment cost.

  1. Competition

The number of existing cryptocurrencies just keeps going up, with new tokens being launched every day. There are meme coins, soccer team coins, celebrity coins, and many, many more. There are also viable cryptocurrency projects among these new coins that could overcome a current limitation and build a strong users network.

  1. Government Regulation

Certain governments do not appreciate cryptocurrency’s decentralized and unregulated character, so look for ways to control the crypto market.

The easiest way to control crypto is to set a tax for any fiat money people use to cash out their coins. However, this tax would apply to specific tokens, so people looking to cash out their profits can simply use a different coin to cash out.

Several countries decided there is no better way to control the crypto market than banning Bitcoin, Ethereum, and a few other coins. Unfortunately, if a country with a large number of crypto users sets new regulations against cryptocurrency, it will negatively impact its value.

Nevertheless, a few countries, such as Japan, are engaging with Blockchain technology, reportedly developing a national cryptocurrency that will lead to more people using virtual tokens.

  1. Scarcity

Theoretically, if there’s a limited cryptocurrency supply, the price will go up as fewer coins are available to buy. However, if 40% of the coins are in circulation and the rest of 60% reserved, the price may decrease when more coins become available for buyers.

Some cryptocurrency projects “burn” existing coins by sending them to an unrecoverable address inside the blockchain. This way, they control the available supply.

  1. Social Media

Cryptocurrency value is known to change as a result of social media hype. And, it works both ways, as the news will lower or raise prices. There is also the impact made by influential people among the crypto community, such as Elon Musk, who influenced the DOGEcoin value several times, whether meaning to or not.

Social media is characterized by chaos, but there is information to be found. For example, crypto exchanges constantly give updates on blockchain currency or inform about crypto scams.

Can cryptocurrencies be overbought or oversold?

There are plenty of factors that have an influence on the demand for cryptocurrencies. The usefulness and purpose of what is in demand often takes a back seat to trends, media recognition, and endorsement by public figures. Even the idea that someone might miss out on easy profit (FOMO) can play a big role in investment choices. Thus we might ask whether it is really justifiable that a stock, security or cryptocurrency experiences astronomical growth regardless of its inherent value?

People who think that it isn’t justifiable would describe such an asset as overbought. A combination of reasons, like those above, spark interest in a particular asset. Traders rush in to purchase it, and since its supply can no longer keep up with the demand, the price experiences substantial growth. Those who believe the asset is trading above its true value might perceive the hype as unreasonable and the investment misplaced.

The reverse can take place, as well. An asset the supply of which is higher than the demand for it can be considered to be oversold. The number of people who want to sell it is greater than the number of buyers. With little or no interest in the asset, its price falls. A keen trader, recognizing the hidden potential of the asset, will make a purchase despite a prevalent negative atmosphere surrounding it. If the asset really oversold, its price will correct back upwards and the trader will make a profit.

Factors affecting cryptocurrency: How to profit in the current cryptocurrency market

As Sun Tzu stated ‘If you know the enemy and know yourself, you need not fear the result of a hundred battles’. What one can do during such a volatile market is to understand what some of the market forces in play are, and act rationally to each situation. There is often a major shift in price when news about cryptocurrencies come out.

For example, when Ripple overtook Ethereum to become the second largest cryptocurrency market cap, the price shot up to $3 from its usual $1. However, after a few weeks, the price stabilised to about $1.5. On the other hand, when news of upcoming crypto-regulations started to surface, the whole cryptocurrency market went into overdrive. The selling frenzy sent the price of most of the cryptos downwards. However, the market starts to stabilise after a week or so. The point I am trying to get across is that the price would fluctuate greatly day to day, but it would often stabilise after a while at a value slightly higher or lower than its original value.

Factors affecting cryptocurrency: How to profit in the current cryptocurrency market

Ripple market cap

This leads to the big question, how to make money off cryptocurrencies? There is no simple answer. However, by identifying companies that have a solid roadmap, a good development team, financial backers, coupled with a future-proof product, it could give a decent indication of how the cryptocurrency is going to fair in the future. Taking Bitcoin for an example, it may hold the title as the ‘King’ of cryptocurrency, however, I believe its rein might be over soon.

This is because Bitcoin’s transaction times that simply too slow compared to other cryptos. It is just not viable for an everyday joe to use to buy a bagel in the morning. There are many other issues with Bitcoin that would warrant another article. However, the key thing to note is that the best way to secure oneself from the fluctuating price of cryptocurrencies is to buy a crypto that is future-proof.

Why Bitcoin?

The Bitcoin network introduced to the world in 2009 by an unknown individual or group called Satoshi Nakamoto. In 2021, there are more than 10,000 different projects in the field of cryptocurrencies. Each of them have its role in building the future of money.

The market value of cryptocurrencies reached $ 1 trillion for the first time in January 2021. It passed $ 2.5 trillion in less than three months later. It shows that this market is one of the growing markets in the favor of its investors.

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