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In 2009, Bitcoin —the first cryptocurrency— was created by developer Satoshi Nakamoto. It is a digital or virtual currency secured by blockchain, making it impossible to counterfeit. While digital currency and cryptocurrency markets have been around for more than a decade now, cryptocurrency has recently gained popularity and momentum.
If you need proof, Bitcoin’s (BTC) price reached an all-time high in 2021, as the price exceeded over $65,000 in February 2021, April 2021, and November 2021. Interestingly, these boosts in price were brought about by events caused by Tesla and Coinbase. While Tesla drove the price up by announcing that it acquired $1.5 billion worth of Bitcoin, Coinbase did so with its first IPO.
It makes you wonder what makes cryptocurrency like Bitcoin so valuable despite being notoriously volatile. It’s not really out of place for Bitcoin to witness 5-10% appreciation or depreciation on any given day. Smaller cryptocurrencies witness even higher price swings.
Understanding what makes the cryptocurrency value fluctuate will help you make wise trade decisions and good returns from your investments. Here are some unique factors that affect cryptocurrency prices.
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Demand and Supply Economics
The simplest way to put it is when there’s more of something available, it is valued less. Similarly, the total supply of the digital currency determines the price of that cryptocurrency. The greater the supply, the higher will be the selling pressure and the lesser its price. However, this is not always true of the cryptocurrency market.
There are several digital currencies like Ethereum, which enjoys an unlimited run of supply. As per the law of supply and demand, it should be cheap, but it has appreciated more than 1,000% in value. Therefore, to have a clear perspective of a cryptocurrency’s potential, one must consider the total supply, the circulating supply, and the market cap as a whole.
Demand can increase as a cryptocurrency gains awareness or as utility increases. Another factor that increases demand is the wider adoption of cryptocurrency as an investment while limiting the circulating supply. To illustrate, when investors started buying and holding Bitcoin in 2021, its price significantly increased as demand outpaced the supply, thereby decreasing the total available supply of Bitcoin.
New Market and Investors
Unlike the stock market, which has two centuries’ worth of history behind it, the cryptocurrency market is relatively new. That is the reason why crypto markets have higher volatility and speculations. Crypto traders and investors are known to buy the dip and sell the new without blinking an eyelid.
However, the nascent phase of cryptocurrency is what makes it valuable. It has been reported that only 2.14% of the 4.66 billion internet users or 100 million users had invested in crypto last year. This number was just half the year before. The 200 years old stock market’s global market cap was around $95 trillion in 2021, whereas the crypto market was already at $1.8 trillion. As the adoption rate goes up, so will the demand and price.
It is a relatively new trend that the growing online trading community has spurred. As already mentioned before, Tesla and Coinbase drove the price of Bitcoin to a record high by simple acts of buying large stock and announcing IPO, respectively.
Similarly, after a tweet by Tesla founder and CEO Elon Musk, Dogecoin’s meme-based cryptocurrency went viral overnight. The value of the joke cryptocurrency keeps soaring every time Musk tweets about it. The latest announcement is that Tesla will accept Dogecoin for merchandise, causing a 15% jump in the value.
Another factor that determines the value of any cryptocurrency is its mass adoption. Whenever more people invest in a crypto coin, there are chances that its value will shoot through the roof. However, mass adoption of crypto is difficult because it is not widely accepted in exchange for goods and services yet. To gain mass adoption, the currency’s utility has to increase to make the deal sweeter for the buyer.
As mentioned before, the cryptocurrency market is still nascent, and many people are not familiar with the digital currency space. New markets tend to be inherently volatile because of several factors. Then some early adopters own a huge amount of cryptocurrency coins and have the power to influence the market and gain profit.
These are the most common factors affecting the value of any cryptocurrency in the market. Any investor should have sound knowledge or understanding of cryptocurrency’s core supply and demand principle and the factors influencing them. It helps in making better investment decisions.
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