For many, what determines the cryptocurrency prices or values of cryptocurrencies remains a mystery.
This is because Cryptocurrencies have always witnessed massive hikes and drops in value.
These fluctuations can throw a crypto fan into deep thoughts.
However, the question remains, what factors exactly swing the mood and impulse of the crypto market?
Well, there are many factors that cause the rise and fall of cryptocurrency prices and you should know them.
For example, a mere tweet on Twitter can send the value either going north or south.
Likewise, a routine closure of banks during weekends can equally make the value take a quantum leap backwards.
That’s how volatile it can be and there are many other factors you ought to know.
Meanwhile, knowing these factors that cause the prices of cryptocurrencies to either rise or fall can save you a lot.
So, an investor stalking the cryptocurrency price to know when to jump in and make that buy must surely be wary of the factors that cause the price fluctuations.
But to know about factors that influence cryptocurrency price fluctuations requires you to know some things first.
What you must know:
What is a Cryptocurrency?
Cryptocurrency is a Blockchain technology, in that it is chunk of data stored in blocks and connected by chains.
A cryptocurrency, also written as crypto-currency, or crypto, is simply referred to as digital or virtual money.
It is an electronic currency that serves and has value like the usual Naira, Euro, Dollars, Pounds, Yen, etc.
However, it has no physical forms like coins or bank notes that can be carried around.
Also, Crypto programmers designed Cryptocurrencies to work as a medium of exchange.
Each crypto coin is recorded and kept in a computer database using codes- a process otherwise known as cryptography.
There are actually around 4,000 such currencies in circulation around the world.
Examples of Cryptocurrencies are Bitcoin, Binance, Cardano, Ethereum, XRP, etc, with Bitcoin being the most valuable.
Recently, the Nigerian government, through the Central Bank (CBN) introduced the eNaira, a form of digital currency.
Many other countries, including those in Africa have done same too. For instance, Ghana has the eCedi.
So, we shall now look into the factors that determine the rise and fall of cryptocurrency prices.
Determinants of cryptocurrency prices:
Many factors influence the prices of cryptocurrency and they include: Demand and supply, government policies, media and production cost.
Others are public acceptance, words or tweets of high-profile figures.
Increased public acceptance of digital currencies:
Recently, many people have begun accepting cryptocurrencies and the popularity of a currency, often, raises its prices.
Many individuals, governments, corporations, and investors have begun to use some cryptocurrencies as means of conducting online transactions.
As more people accept and invest in a crypto coin, its value can shoot through the roof.
Supply and Demand:
Most people hold digital currencies in savings and because of this, they are not usually available.
Also, as the usability of most cryptocurrencies increases among people, the demand for them equally rises.
This rise in demand and shortage in supply increases the values of the currencies, sending the prices high.
Take for instance, in 2011, the price of Bitoin, a type of cryptocurrency, dropped from $32 to lows of $2, shedding off $30.
This was as a result of many people nursing fears that the currency might be useless.
However, last year, particularly in June, 2020, the Cryptocurrency price took a bullish run from $9,000 to $35,000, making 290% gains.
This was when more and more people began accepting the currency.
So, as long as demand outweighs supply, the price of the cryptocurrency will keep going up.
Words or tweets of high-profile figures:
Tesla CEO, Elon Musk has a wide and large reputation for his tweets that swing cryptocurrency prices.
Recently, his tweet sent Bitcoin prices about 4% high.
He had tweeted that he was having active discussions regarding the sustainability of the digital coin.
In June 2021, Musk again made the value of another type of cryptocurrency, cumrocket jump nearly 400%.
Also, his tweet skyrocketed the value of Floki-themed cryptocurrency and in September, he speculated about his new Shiba Inu puppy on Twitter.
With his tweet, Shiba Floki rose 958.09 per cent in 24 hours.
According to CoinMarketCap, cryptocurrency Shiba Floki prices rose about 1,000%.
Similarly, Musk’s tweet at some point about breaking up with Bitcoin sparked a price dip of more than 7%.
Government policies/ rejection or acceptance:
Another factor that sends the prices of cryptocurrency flying high or low is world governments’ acceptance or rejection.
For instance, Bitcoin value skyrocketed 6% when El Salvador decided to become the first country to adopt the cryptocurrency as legal tender.
Similarly, the US government’s Securities and Exchange Commission (SEC) classifies cryptocurrencies as securities.
Consequently, the SEC tries to approve cryptocurrency-based exchange-traded funds, (EFTs).
Conversely, a rejection by a government can send the prices crashing.
For instance, cryptocurrency prices, especially Bitcoin price crashed by 20% in May, 2021 with the national ban on cryptocurrency services by Chinese government.
Bank closures and less trading on cryptocurrencies during weekends:
In many countries, banks close during weekend.
When banks close, the volume of trading in cryptocurrencies become low.
Trading gets low because investors may not be able to add money to their accounts.
With this development, market panic sometimes sets in where there’s a lot of selling pressure.
Consequently, the same trade size can sell for different values.
This closure leads to less trading on cryptocurrencies, resulting in cryptocurrency volatility.
Trading on margin:
Trade margin is when investors borrow money (Margin) from exchanges to buy more assets.
So, how this development influences cryptocurrency prices is that when trade in crytocurrency dips, those investors must repay their margin calls (Loans).
So, if they fail to do so, the exchanges may sell the digital currencies of the investors to recover the margins lent to the investors.
Panic selling and Buying:
Cryptocurrencies are assets.
However, some investors feel jittery about the prospects of cryptos due to a poorly performing stock market.
Also, they feel jittery because of the bans by several governments.
As a result, they start selling their cryptos.
In September, Bitcoin prices tumbled 7% when China imposed ban on cryptocurrencies.
Positive Media reports:
Another factor that influences the prices of cryptocurrency is positive news in the media affirming assuring safety to investors.
The general public gains a greater understanding of cryptocurrencies and Bitcoin as a result of increased media attention.
In June 2020 to June 2021, the value of cryptocurrency surged 880% after a Supreme Court in India repealed the ban on crypto.
Corporate bodies and institutional adoption/integration:
Recently, corporate bodies and institutions have shown confidence in the value of cryptocurrencies, thereby raising their prices.
For instance, companies are converting their cash treasuries into cryptocurrency.
Examples of such companies are Square and Microstrategy.
Both American companies bought $50 million worth of Bitcoins and converted $425 million worth of cash reserves into Bitcoin, respectively.
These companies, believe cryptocurrency is a better store of value.
Also, Paypal, a global digital payments company, In October 2020, announced the launch of cryptocurrency buying and selling features on its platform.
This wide acceptance and increased integration by even corporate bodies further show confidence in cryptocurrency.
Consequently, more people show interest and the prices rise and vice versa.
Cost and amount of production:
There are actually around 4,000 cryptocurrencies in circulation.
This is because it is easy to develop a new cryptocurrency.
Developing one crypto coin, in basic terms, is simply computer code generated by open-source software designed to transact value online.
The cost and time of producing a form of cryptocurrency as well as the purpose also determines its value.
Also, the amount of cryptocurrency that the system allows to exist can also affect the price.
For instance, amount of Bitcoin the system allows is 21 million.
So, once production (Mining) reaches that amount worldwide, mining operations will cease to produce new bitcoins.
This system regulates the supply of the cryptocurrency.
Also, miners use excavators to mine bitcoins and this process is tedious.
Consequently, if the price of extracting virtual currencies increases, it affects the prices too.
It is very important, especially for a person intending to invest in cryptocurrency to note the factors.
Knowledge of these factors will help you increase income and save losses.
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