Cryptocurrencies are currently very popular throughout the world. Many investors have started to consider cryptocurrencies as a trustworthy asset. If you are one of these investors, you are probably wondering what influences the value of cryptocurrencies. In this article, we will look at the underlying factors that will help you better understand how the world of cryptocurrencies works and behaves.
What cryptocurrencies are backed by
Common cryptocurrencies simply aren’t backed by anything. They have no single issuer, no guarantee of users’ rights, and exchange rates fluctuate widely. The value of digital assets is determined by the structure of the projects within which they are created and used: decentralization, coin issuance and transaction transparency.
Conventional wisdom dictates that a national currency is secured by the gold and foreign exchange reserves of the country in whose territory it is issued and by its gross domestic product. In fact, the value of paper money is directly determined by the state of the national economy and government actions. The issue of paper money is unlimited. Central banks issue new bills and regulate their circulation. Electronic currencies, unlike paper money, have no physical equivalent. The volume of cryptocurrency emissions is known in advance. In other words, cryptocurrency is secured by the cost of mining, issuance and demand.
Supply and demand
It is a well-known economic factor: an increase in interest in a currency leads to an increase in its price and vice versa. And because this market is not subject to any regulatory authority, but only to supply and demand, it is very volatile. Trader and investor interest in Bitcoin and other digital currencies is reflected in their price, but not as much as many people think. In reality, interest only increases demand for tokens and pushes the price to the right level. For traders who prefer to make money on short-term trades, this information is important. In the case of long-term investments, this method is rather useless.
If the supply of cryptocurrency tokens is large enough and the demand from traders and users is low, its value will decrease. Conversely, if supply is limited and demand is high, the value of cryptocurrency will rise. This is due to the scarcity factor. This leads to higher prices and is one of the factors that led to the Bitcoin price peaking at $67,000 at the end of 2021. Bitcoin’s peak volume of 21 million is relatively small compared to other tokens, while demand has skyrocketed in recent years.
The atmosphere for cryptocurrency investors depends on the news; the news can both stimulate demand and provoke panic.
The media and public opinion have a significant impact on the price of cryptocurrencies. If negative information about a coin or a platform appears, its price tends to fall. However, if a token gets a lot of support and positive news coverage, its price will almost surely go up.
When the economy is going badly, investors can also put more money into cryptocurrencies. Just keep an eye on key indicators, namely employment and gross domestic product. This will help to understand the state of the economy.
Market news should be one of the most important things to check daily when trading cryptocurrencies. In addition, we should not forget that the media can serve to educate traders about cryptocurrencies and help increase people’s interest in buying cryptocurrency assets.
Mining and staking
Miners maintain transactions, incorporate them into new blocks, and subsequently earn coins. Blockchain maintenance is a very energy-intensive activity. In particular, blockchain based on robot confirmation, which is the most common, requires a huge amount of energy. Currently, Bitcoin blockchain consumes as much electricity as a small country. And this is reflected in the price, as it takes a certain amount of energy to mine the coin.
While the impact of miners on the price of cryptocurrencies used to be serious, now, according to analysts, it is gradually weakening. This means that fears that the price of Bitcoin will collapse due to mining are subsiding.
Right now, Bitcoin miners get 6,25 coins for every block found, at a current price of just over $120,000. But back in the day when Bitcoin mining first started, miners were getting 50 coins per block, but keep in mind that the price of Bitcoin back then cannot compare to today.
In theory, the more coins circulating, the greater the influence on their value. For example, there are now more than 19.18 million Bitcoins mined, and miners are mining about 900 a day. So, new cryptocurrency increases its quantity in the market, which increases the supply.
Alternative methods to mining, such as staking, have been introduced to solve this problem.
Staking is an alternative to mining and is a more environmentally friendly way of mining cryptocurrencies. The users get paid in digital currency to keep the network running, but unlike mining, there is no need to purchase expensive equipment or carry electricity costs. This investment tool is similar to a bank deposit – you need to choose promising cryptocurrencies and a reliable site (wallet) where you will keep your assets.
Whales in the cryptocurrency world are members of the cryptocurrency community who own a significant amount of money “in their hands” and are able to affect the market and price movements. As a rule, this group includes owners with a certain amount of money in their wallets, as a rule from 1000 Bitcoins and higher, but this amount can vary depending on the currency rate. Whales can be individuals or, more likely, large organizations. So, there is no doubt that they have an impact on the market.
The very term “whale” comes from the association with large marine mammals. When an animal comes out of the water and falls, ripples are formed. In trading, the same thing happens. When large whales make a trade, prices will fluctuate.
Large participants have a significant impact on the market, and therefore on the value of cryptocurrencies. If other users see large traders buying and selling digital assets, a chain reaction begins. For example, if a large number of coins are sold, small investors start selling. This creates a sense of some panic, which has a negative impact on exchange rate dynamics.
The participation of whales in the market can indicate sentiment toward a particular cryptocurrency. If whales are buying, it may signal that they believe the market will go up. If they do the opposite – selling, it may indicate that they believe the market will fall.
With whale investors, you need to be able to react and consider their actions when trading cryptocurrencies.
Competition also has a strong impact on the cryptocurrency market. When a new cryptocurrency appears in the cryptocurrency world – a cryptocurrency that is somewhat similar to its existing “brothers” – it is possible that its value will rise. The new cryptocurrency may have new features and be more advanced in the market than the existing ones, which may increase its price and weaken its competitors. If one coin proves to be better than another, people are likely to prefer it.
The emergence of new, faster and more efficient technologies in the market will affect the demand for older technologies. Bitcoin is currently the market leader, but its technology has long been recognized as flawed, and there are many other coins that certainly deserve attention. For example, Cardano (ADA), Stellar (XLM), Monero (XRM) and others.
Security problems and failures
System hacks, exchange shutdowns, and hacker attacks are unpredictable events. A single flaw in the software code can cause owners of thousands of cryptocurrencies to lose their money and cause a market crash. The current cryptocurrency market has numerous exchanges and wallets through which most of the money flows. However, on the other hand, there is an advantage: due to the prevalence of cryptocurrencies, an exchange hack will not cause too much loss.
Security vulnerabilities can also be a problem because they indicate that something has been coded incorrectly and could lead to future attacks.
Hacking attacks on exchanges are also damaging and do not contribute to the popularity and image among traders. Consider the hack of Poly Network, the cryptocurrency interaction protocol, the largest confirmed theft of cryptocurrency in history and one of the most recent. Hackers) managed to tamper with the vault and release the funds stored in it without obtaining legal permission from another blockchain. On Aug. 10, they took advantage of this vulnerability to steal a total of more than $610 million.
Blockchain and cryptocurrency exchange disruptions have an immediate negative impact on currency prices. Asset prices fall, and traders who open long positions suffer losses. It is impossible to predict them, but risks need to be minimized through diversification.
When a coin gets mass adoption, it can lead to a dramatic increase in its price. The reason is that the total number of most cryptocurrencies is limited, and an increase in demand directly leads to an increase in price.
So what does it take for cryptocurrencies to really become widespread? Such a factor is the ability to use cryptocurrencies in a real-world environment, such as many places that accept cryptocurrencies as payment. If cryptocurrencies are used in everyday life like current fiat currencies, they have every chance of playing an important role in the future.
Blockchain technology is actually already being applied in areas other than finance, such as gaming, medicine, and others. The implementation of smart contracts may take longer, but if they are used in real life by various organizations, it could lead to an increase in the price of crypto.
Probably one of the major factors affecting the cryptocurrency market is regulation. It is no secret that cryptocurrencies are regulated at different levels in different countries. When a cryptocurrency becomes popular, there is a greatly increased chance of regulation of that currency by governments. One thing to keep in mind – those regulations can lead digital money to become more centralized. This will have a huge impact on the price of cryptocurrency.
The number of transactions will fall, critics say, and they will be controllable because of the regulation and lack of security that governments may see in cryptocurrencies. Certain institutions may even ban them.
Differences in cryptocurrency prices on various exchanges
Prices on different exchanges can differ by 10% or more. Cryptocurrency prices are influenced by various indicators. For example:
Liquidity. This indicator determines how quickly a trader can buy or sell an asset without changing its value. The more liquid an asset is, the more money it takes to significantly increase or decrease its value. Therefore, when liquidity is high, the price is more stable. That said, liquidity is different on every exchange.
Lack of coordination. Exchanges do not agree between themselves on how to regulate the price of cryptocurrencies, and there is no such law. The price is formed freely, depending on trading activity.
If you buy and sell cryptocurrencies on a particular exchange, the right thing to do is to look at the prices on that trading floor. On the WhiteBIT exchange cryptocurrencies prices you can get more accurate data about cryptocurrency trading volumes and prices.
Many factors influence the dynamics of digital assets in one way or another. In order to get the full picture, it is necessary to analyze the impact of these factors on the cryptocurrency market as a whole. Analyzing only individual indicators can lead to erroneous information. The value of a cryptocurrency can change very quickly, but over time the trading volume of some coins may increase while the volatility continues to decrease.
In the long run, the value of digital currencies is determined by factors such as mass adoption and the real value that these currencies bring to our daily lives compared to other traditional means of payment. Also decisive is the acceptance by governments and central banks of the new technology or the difficulty in managing it. Finally, ease of use and security are key elements that must overcome existing standards so that everyone can use cryptocurrencies the same way they use fiat currency.