What Affects Cryptocurrency Prices?
The financial market is buzzing with talk of cryptocurrencies. Besides choosing the correct coins to invest in, the fundamentals of understanding crypto also include learning about what affects cryptocurrency prices.
Depending on the market condition, cryptos feature their own highs, and lows. Join us below as we explore the factors behind the prices of various coins.
What Affects Cryptocurrency Prices: Fundamental Factors
Community involvement determines the value of cryptos — just like every other currency. This involvement may include the coin’s scarcity, its utility, and also the inherent demand for it.
However, most cryptocurrencies evolve from private blockchain firms. Therefore, the price of crypto coins stems from the image of the company, the project viability, and its perceived value. Here’s a closer look at these and some other factors that affect cryptocurrency prices:
● Market cap
● Government regulations
● Cost of production
● Cryptocurrency exchanges
● Node count
When it comes to the most apparent indicators of a coin’s market value, market capitalization is at the top of the list. You can calculate the market cap if you multiply each coin’s price with the total coin supply.
Let’s observe a market cap example to understand better what affects cryptocurrency prices. Imagine you have two coins, Coin A and Coin B. The price of Coin A is $4, and there are 3 million circulating coins. On the other hand, Coin B’s price is $5 per coin, and there are 1.5 million circulating coins.
After applying the previously mentioned formula, you conclude that Coin A’s market capitalization is $12 million (3 million coins x $4 per coin). The market capitalization of Coin B is $7.5 million (1.5 million coins x $5 per coin).
Therefore, even though Coin B is more expensive, Coin A leads in terms of market capitalization. Using this method can give investors an excellent idea of a crypto coin’s value.
This factor follows the basic economic principle of supply, and demand. A currency’s price will increase if there is a limited supply of cryptos. Conversely, the price will decrease due to a higher supply of cryptos.
Additionally, some cryptocurrency projects lead (“burn“) coins to an irretrievable address inside the blockchain. This method serves as an indispensable way of controlling the supply.
Government regulations are a critical factor when looking into what affects cryptocurrency prices. When cryptocurrencies gain momentum and become more mainstream, governments are more likely to take note and adopt regulations specifically targeting them.
Numerous governments worldwide do not appreciate virtual currencies’ decentralized, and unregulated nature. Consequently, they attempt to control this market by taking specific measures.
One thing that numerous governments are doing is adding taxation to transactions, because this is the most straightforward way to control the crypto market. Such limitations and regulations increase the centralization of cryptocurrencies, thereby affecting their price.
Cost of Production
Crypto prices also depend on the production costs. In other words, miners use special hardware, and servers to generate new tokens and maintain daily transactions within the network. They receive virtual tokens and a network fee as compensation for their hard work.
However, if mining costs increase, it is almost certain that the price of a cryptocurrency will also go up.
Crypto exchanges are another critical factor when it comes to what affects cryptocurrency prices. If a crypto token is available in numerous exchanges, its prevalence indicates that more people buy it.
However, keep in mind that most reputable crypto exchanges — especially trusted, and regulated ones — are rigorous in their due diligence when researching which coins to list. Therefore, becoming widely listed, and popular among typical users is no easy task, which often affects a coin’s price.
Detailed information about any cryptocurrency is available on the exchange where it is listed. You can better understand a cryptocurrency’s current and past value, total coins in circulation, performance over weeks and months, and market capitalization by observing a crypto exchange.
For example, the CEX.IO platform is home to numerous cryptocurrencies, and more new ones keep becoming listed almost daily. This platform lets you fund your account balance with crypto, and jumpstarts the process of your coins earning passive income for you.
The node count shows the number of active crypto wallets in a network. Simultaneously, this indicator shows the strength of a particular community. So, a low node count indicates a weak community, while a high node count denotes a strong one.
You can look for the node count and total market cap of a cryptocurrency to see whether it is overbought or has a fair price. For example, you can check Bitcoin’s node count on the Bitnodes site, and that of Ethereum — on the Ethernodes.
When it comes to what affects cryptocurrency prices, you can use any of the previously mentioned factors (ideally — all of them). Regardless, you should consider all the risks, and perform thorough market research before deciding to invest in any cryptocurrency.