What Affects Cryptocurrency Price?

Cryptocurrencies can be subject to long and short-term swings in price, so it is important to understand causes cryptocurrency price changes before you even think of signing up to an exchange, let alone trading crypto.

This guide is designed to help you understand the many factors that impact the price and value of a cryptocurrency, and will hopefully make investing in this vibrant but volatile sector a little bit easier.

Also see: Best Crypto Exchanges

Cryptocurrency supply

The price of cryptocurrencies can go up and down depending on the level of supply.

Scarcity of goods often makes an item more sought after and, as such, it is able to command a higher price.

Cryptocurrency supply is determined by how many coins are available to purchase and how many can be, or are likely to be, created in the future.

There are different ways in which cryptocurrency can be made, the most common of which is through data mining. Data mining is a virtuous circle in which vast, decentralized networks of computers around the world verify and secure blockchains, and in exchange for contributing their processing power, computers on the network are rewarded with new coins.

Alternatively, developers may decide to set up an initial coin offering to attract funding for the launch of a new cryptocurrency.

Some cryptocurrencies may have a maximum number of coins that can be produced while others have limits on how many can be created each year. These different control mechanisms act as a way of controlling the supply, and thereby also the price, of a cryptocurrency.

The maximum supply of Bitcoins, the world’s oldest and largest cryptocurrency, was limited by its inventor to no more than 21 million units.

To date, just over 18.5 million coins have been mined so far. Once Bitcoin reaches the limit, the value of coins could go up due to this supply cap as investors become aware that the supply limit has been reached.

In contrast, Ethereum, the second-largest cryptocurrency, has no supply limits. And, as such, it is harder to predict what the long-term value of this currency is likely to be.

Demand for cryptocurrency

Supply and demand are two sides of the same coin and it is the demand for an item that defines its ultimate value. This is especially true for a cryptocurrency.

Put simply, there is no point in managing the supply levels of a cryptocurrency that no one is interested in or actually wants to buy.

The higher the demand for a crypto, the greater the likelihood that its price will rise as more investors are wanting to buy it.

Institutional interest, such as asset managers launching funds investing in the crypto market or investment banks running crypto trading desks, can help encourage further interest.

High-profile support, such as a helpful tweet from a respected individual, can also boost demand and generate a price increase.

For example, Tesla founder Elon Musk announced in early 2021 that his electric car company had purchased $1.5 billion of Bitcoin.

He also said that customers could purchase his company’s electric vehicles with the cryptocurrency as well as fiat currencies, though he had to backtrack on this statement in the wake of concerns about the environmental impact of Bitcoin mining.

Similarly, Bitcoin got a boost when the US Commodity Futures Trading Commission approved the launch of the first ever exchange trade funds to invest in Bitcoin prices in October 2021.

Demand may also be higher where there is a need for alternative forms of money transfers. This could be in instances when the value of a country’s fiat currency has dropped dramatically, as exemplified recently in the UK. In any case, in instances when the credibility of traditional bank or payment systems takes a hit, the value of alternatives, such as cryptocurrency, will almost certainly rise.

Times of financial uncertainty may also tempt people to seek alternative assets.

Competition

Bitcoin and Ethereum may be the best-known and largest cryptocurrencies by market cap, but they are by no means the only cryptos available.

Their recognition is in part thanks to their “first-to-market” advantage, so they have had more time to attract funds. According to Forbes, there are currently more than 20,000 cryptocurrency projects worldwide, many of which are cheaper than the more established coins on the crypto market.

The world of cryptocurrency is extremely competitive, and investors regularly flock to coins that are in fashion or have gained consumer recognition by offering a product that is unique and exciting.

Many cryptocurrencies try to differentiate themselves by offering unique selling points, such as better technology or functionality of their blockchain, which is the underlying system that a cryptocurrency operates on.

Some types of coins may come in and out of fashion. Meme coins became more popular and valuable in the crypto market in 2021 after celebrities such as Musk and Snoop Dogg tweeted their support for Dogecoin, a cryptocurrency that was initially set up as a joke form of Bitcoin.

This support, coupled with its attractive price and total market capitalization, which was a lot lower than Bitcoin and Ethereum, offered an attractive and low-cost way for investors to get a slice of the crypto pie.

Market sentiment

One of the main factors that drive any asset’s value is market sentiment.

Attitudes towards cryptocurrencies can help drive the price of individual coins and the wider market.

Sentiment can be influenced by the cryptocurrency’s values, vision, or practices.

Investors were initially attracted to Bitcoin and Ethereum as they were the first to offer decentralized ways of transferring money, as well as having the technology in place to store, track, and protect transactions.

Investors may also follow the crowd and invest due to social media or news articles. This helped Dogecoin rise in value during 2021 when celebrities and entrepreneurs tweeted their support for the meme coin. As well as Elon Musk, the famous rapper Snoop Dogg tweeted his support with a “Snoop Doge” tweet that added fuel to the fire.

That said, as with any trend, it can also work the other way. Bad news and legal or regulatory crackdowns can send the value of a cryptocurrency crashing to the ground in a matter of hours.

News developments

Investors rely on news stories as a way to monitor the cryptocurrency market. A positive story can boost cryptocurrency pricing due to an upturn in market sentiment. This can increase demand in the crypto markets, helping to push up prices.

However, bad news can make investors panic and will often result in investors rushing to sell off their crypto holdings. Oftentimes companies, especially in a sector as fast-moving as crypto, will struggle to recover their initial luster and price. This can push cryptocurrency prices down.

Regulation of crypto

There is no consistent global regulation of the cryptocurrency sector.

One reason for this lack of oversight is that the crypto industry is so decentralized that it is hard, if not almost impossible, to implement any meaningful legislation. Traditional authorities, financial regulators, and central banks are physical entities and are without the global authority and reach needed to police cryptocurrency.

In response to this, some countries have gone so far as banning Bitcoin and other cryptocurrencies as they are worried about price risks and criminal use.

In the US, meanwhile, the current government has just released its very first framework guidelines regarding what the regulation of cryptocurrency should look like.

This includes attempting to find ways in which the financial services industry should evolve to make borderless transactions easier, as well as how to crack down on fraud in the digital asset space.

Regulation can be a way of giving cryptocurrencies legitimacy as exchanges, where you can trade cryptocurrency, have to conduct due diligence on coins to ensure they are genuine and aren’t scams. This can help push the price up as investors may be reassured that a certain cryptocurrency has a bright future.

But prices can fall across crypto markets if regulation goes as far as banning Bitcoin or other cryptocurrencies, as countries such as China and India have done.

Production costs

The cost of producing a cryptocurrency can affect the price.

At first glance, all cryptocurrencies appear to be the same. After all, despite having certain differences in functionality, to investors and casual observers they are all digital currencies that can only be exchanged online.

But behind the scenes there is a lot going on. Just as it costs more to manufacture a high-end Porsche compared with a Fiat Uno, the more it costs to produce a cryptocurrency, the higher its value will be.

This is one reason why Bitcoin prices are so high. A lot of expensive Bitcoin mining equipment is required, and a lot of computational power goes into producing a single Bitcoin.

Cryptocurrency adoption

Adoption can help drive up values as it helps move them into the mainstream and gives the cryptocurrency industry credibility.

This includes shops accepting cryptocurrencies as forms of payment or apps that have the option for you to buy services or goods using virtual cash.

Mass adoption can have a significant impact on the reach and value of a cryptocurrency, and many investors rely on this as a good indicator of cryptocurrency values and growth potential.

Two indicators of adoption last year included PayPal letting users buy and sell digital currency and El Salvador recognizing Bitcoin as legal tender.

Political events could also push prices down, such as if governments ban or publicly oppose the use of cryptocurrencies.

Availability

Similar to adoption, the easier it is to buy a cryptocurrency, the higher the price can be.

Availability is helped by trading platforms and crypto exchanges letting users buy, sell, and hold certain cryptocurrencies, such as Bitcoin.

Platforms will tend to conduct due diligence on existing cryptocurrencies or a new coin before letting investors buy and sell to check they are still operating and aren’t scams.

For example, Dogecoin has been around since 2013 but was only added to eToro in 2021 as a result of the hype it generated that year.

Cryptocurrency exchanges

A cryptocurrency exchange provides a platform to let users buy and sell crypto assets, and the level of activity with this new technology can impact values.

The price of a cryptocurrency can vary across different exchanges as localized factors, such as the trading volume on the respective exchange as well as demand, supply, and trading fees, will play a part in setting the price.

Some use similar technology to determine a fair price for virtual currencies.

This can still have an impact on the overall price as the more widely available a currency is on exchanges, the more interest and demand there may be, which will then help push up valuations.

There may also be a price crash if there is a sudden rush to sell cryptos through an exchange.

This could be due to an issue with the cryptocurrency or the exchange itself.

Crypto utility

The more useful a cryptocurrency is, the more valuable it can be. This is known as its utility.

Cryptocurrencies can have different functions. For example, Ethereum has its own blockchain network that lets anyone build apps that use the cryptocurrency for decentralized finance tools, such as loans without the need for a bank.

Some may operate in different sectors, such as providing forms of payment in virtual reality computer games.

Internal governance

A key fundamental when investing in assets such as shares is how the company is run or governed.

Cryptocurrencies are no exception.

It is important to know who is behind a cryptocurrency, their reasons for launching, the corporate culture and vision for the crypto, and how the technology behind the crypto works and is managed.

Concerns about governance, such as hacks or unexpected blockchain changes, can impact a cryptocurrency’s price. And if a corporate culture is lackadaisical, or the company launched purely out of a sense of opportunism, then it is more likely to fail.

The better understanding there is of how a cryptocurrency is run, the more people may be willing to invest.

Code updates

Cryptocurrency founders may occasionally change the code for their virtual currency.

This may be to fix glitches on its blockchain or just to improve security and privacy.

For example, Bitcoin released an update called Taproot on its blockchain in November 2021 which simplifies how transactions are recorded and ensures they take up less online storage space.

Hard forks

A hard fork is a type of code update.

Unlike other updates, a hard fork can be a significant change for cryptocurrency investors.

A hard fork splits a blockchain in two.

It usually happens when developers, tech insiders, or mining teams disagree with the direction of a cryptocurrency, so some will split and adapt the blockchain code to create their own or also form new coins.

The largest hard forks so far have been Bitcoin Cash and Bitcoin Gold, created in 2017 when miners disagreed on blockchain alterations.

These changes can create volatility in the market due to concerns about the future of a cryptocurrency affected by a hard fork.

Whales

Institutional investors with lots of money can have an impact on prices, pushing values up if they invest a lot and down if they decide to sell.

They are known as whales, reflecting their size and influence on global markets. If a whale makes a splash in the market, either with an acquisition or a sale, then others are sure to follow.

Nodes

A node measures how many computers or how many active wallets are linked to a blockchain network to record and validate transactions.

You can find these measurements, known as the node count, through cryptocurrency exchanges or directly on the cryptocurrency’s website, assuming it has one.

The more nodes there are, the more likely it is that a cryptocurrency is being used and is popular, which gives it value.

The node count is a good way of comparing the value of cryptocurrencies against each other.

Scandals

Sadly, there have been plenty of scandals in the cryptocurrency market.

This includes scammers trying to exploit people with fake cryptos that make bold claims of being the next Bitcoin. Unfortunately, these flashes in the pan exist simply to take as much money from people and then vanish.

Scammers will create a new coin and try to push the price up through social media before selling their stake and then closing or just stealing people’s money and removing their online presence.

Other types of scandals include hacks of blockchains or cryptocurrency exchanges that can steal or block access to investor money.

All this harms confidence and market sentiment, which can push down prices.

Inflation

Rising inflation means the cost of living, such as food prices and energy bills, are rising. It also devalues what fiat currencies, such as the British pound or US dollar, are worth.

Funds left in the bank often won’t earn a decent level of interest to match or even beat inflation. This can be a good reason to make people invest in cryptocurrencies for a higher return, pushing prices up. Returns can be higher than the rate of inflation, making cryptocurrencies attractive compared with cash when the cost of living rises.

There is still the risk that cryptocurrencies fall in value, and you could end up losing money, so it is important to understand what you are investing in and to only invest what you can ultimately afford to lose.

Cryptocurrencies are just one way, and probably the riskiest, to try to beat inflation.

The traditional method is to seek other, more established assets, such as stock market investments or property.