The values of cryptocurrencies are always volatile. As these currencies work in the digital and virtual worlds, we see many changes made through the years to adapt their usage to their users. Because they’re operating through decentralized systems, they don’t have regulatory authority, and, therefore, people made cryptocurrencies more popular due to increased demand.
But sometimes, you may be wondering why the crypto market is behaving in a certain way all of a sudden. Certain influences are more challenging to spot because you need to watch the development of cryptocurrencies’ reputations intensely. Therefore, in this article, we’ll talk about the main aspects shaping the value of the crypto world.
1. Supply and demand
The supply and demand rule works in the physical markets and cryptocurrencies. These two factors strictly determine the market prices and volume of goods traded:
- The law of supply states that there will be more of a quantity supplied at higher prices.
- The law of demand states that buyers will demand less of a product when the price is high.
But how do these regulations influence the cryptocurrency market? Virtual currencies gain value when the demand is higher than the supply. Let’s take as examples the two most known cryptocurrencies at the moment: Bitcoin and Ethereum.
Bitcoin has a fixed minimum supply; therefore, it only increases by a fixed amount with each new block mined on the blockchain. On the other hand, Ethereum, which has no cap on the supply, offers fixed rewards per block mined, which eventually makes the supply increase in a volatile way.
Secondly, when talking about demand, when investors started buying Bitcoin last year, the price increased as the supply significantly decreased. With the Ethereum blockchain, the demand increased as the tokens became more used. So, it’s a game of knowing when to spot the demand and supply changes.
2. Cost of production
Cryptocurrencies are produced through mining. This process involves using a computer to verify the next block on the blockchain, which requires computing power (expensive equipment and electricity). To successfully mine, miners will compete with each other to verify blocks, so the cost of mining will increase. Along with this cost growth, it’s expected that you’ll only mine if the expenses are exceeded by the value of the cryptocurrency you’re mining.
Creating cryptocurrencies requires certain expenses, which might also become a factor for change. The technological matters and the initial offer take time, but the concepts can be changed from one currency to another. For example, the creator of the Ethereum concept was initially inspired by Bitcoin. Still, he wanted to create more than a cryptocurrency exchange, but a blockchain space for everyone to carry out any kind of transaction.
3. Internal governance
All cryptocurrencies work by specific rules, with projects adapted to the community that’s using that virtual currency. Therefore, some tokens offer the opportunity for holders to contribute to future projects through a consensus among stakeholders.
For example, Ethereum will update its network to a proof-of-stake system to minimize the miners’ expenses because the current system uses a proof-of-work method, which, even if most cryptocurrencies use it, is no longer keeping up with the transactions.
But this change will greatly impact the price of Ether because having no limits regarding the supply, more and more people will be able to mine better and faster. You can look up Binance for more details about Ethereum’s development on the market. This decentralized technology allows users to have more benefits regarding the transactions, as well as building your wallets and Dapps.
4. Market trends
Let’s face it, in almost every industry, the market trends rule the course of each product. The impact of market capitalization and trading volume across exchanges is undoubtedly changing the prices of cryptocurrencies. The best example is with the dApps used on the Ethereum blockchain. Most of these apps are adding net worth to Ethereum only by having the advantage of smart contracts, therefore dominating the market.
Another trend influencing Ethereum’s popularity is the rise of DeFi and NFTs, which are mainly transferred and used in this blockchain. DeFi is a system that provides financial services and products without the need of a bank and other institutions, hence the increased usage among users. These systems eliminate the usual bank fees for transactions and let you hold your money in a secure digital wallet.
On the other hand, NFTs can be about anything but digitally. You’ve heard about selling digital paintings for millions of dollars or other unusual transactions until now. Well, this is a non-fungible token, meaning that you can’t replace it with something else; it’s unique. Bitcoins are fungible because you’re trading a bitcoin for another, but you’re trading more uncommon assets here. Therefore, as these trends rose and gained popularity, so did the platform where the transactions took place.
5. Media coverage
We’re living in a fast-changing technology world, with smartphones becoming part of our lives. Nowadays, to buy a product, the first place you go is the internet, where you can see all the information needed before the actual purchase.
Therefore, your opinion might be influenced by what other people say about that product, making it easier to choose if you will buy it or not. This also applies to cryptocurrencies, especially when celebrities encourage these online transactions.
The best example to prove this is the rise of Dogecoin transactions, which is a cryptocurrency that initially was created as a joke, but it rapidly expanded after some tweets from certain celebrities. In 24 hours, dogecoin rallied 37% with a high record, and its market value was since boosted to become a popular virtual currency.
In other words, cryptocurrencies’ values depend on many factors that don’t necessarily have to do with their users. The most important factor is the supply and demand law, which is a certainty when it comes to going low or high in terms of usage. Then, other technical issues will make those currencies trustworthy or not, so it’s up to you to choose suitable digital tokens for your transactions.