Outline
- Introduction
- What is Cryptocurrency?
- How Does Crypto Gain Its Value?
- List of Factors That Influence Price of Crypto
- Final Thoughts
Introduction
The phenomenon of Bitcoin and massive crypto adoption in the fintech industry is all conquering but there are still many people who do not have a clue about the true concept of crypto, what affects the price of a cryptocurrency and what stays behind the frenzy volatility. Too many newbie investors in cryptocurrencies easily get shocked with unpredictable price swings on the cryptomarket ignoring the key factors that affect the cryptocurrency value and pricing algorithms. In this context, the following blog article is devoted to the topic of what affects the price of crypto, what impacts the purchasing power of this or that coin (be it Bitcoin, Ethereum, Chanlink, Dogecoin, or any other virtual currency).
What is Cryptocurrency?
It is a good idea to start the article with the meaning of a cryptocurrency and how it is determined by experts. By and large, a cryptocurrency is a digital or virtual currency that is cryptographically secured. It is a tradable digital asset built on the blockchain technology and it does not need a central issuing body to control its turnover. Notably, cryptocurrencies are currencies because they serve as a medium of exchange to buy, sell, make exchanges just like fiat currencies in the conventional banking sector. The digital ledger shows and determines the transaction history for every coin or token and in order to prove the ownership right and prevent double spending. The core features of cryptocurrencies that attract the audience’s attention are inflation-resistance, decentralized nature, transparency, no or little regulatory control. Broadly speaking, all cryptocurrencies can be categorized into two distinctive categories:
- Coins.
- Tokens.
At the date of writing, the total number of all cryptocurrencies amounts to 19,484 units, as cited in cryptocurrency analytical portal CoinMarketCap.com. A coin is a virtual currency (like Bitcoin, Ethereum, Tron, Stellar and also including many other cryptocurrencies) that runs on its own blockchain infrastructure. Some crypto enthusiasts use the term “altcoin” to refer to coins other than Bitcoin affected by the overhyped popularity of the forefather of all cryptocurrencies. Likewise, tokens are similar to coins, however the main difference lies in the fact that they are not native digital assets. In simple terms, tokens do not have their own blockchain infrastructure and instead use other blockchains. Let us observe a table that includes both coins and tokens.
| Coins | Platform | Tokens | Platform |
| BTC | Bitcoin | Cratos | Ethereum |
| ETH | Ethereum | sUSD | Ethereum |
| SOL | Solana | Metal | Ethereum |
| THETA | Theta | BitTorrent-New | Tron20 |
| CCD | Concordium | PancakeSwap | BNB Smart Chain (BEP20) |
| MATIC | Polygon | JOE | Avalanche C-CHaine |
| WAXP | Wax | WEMIX | Klaytn |
Source:https://coinmarketcap.com
How Does Crypto Gain Its Value?
The crypto market can experience wild fluctuations of prices, costs and it explicitly influences the trading involvement of single and institutional trading experts. For instance, the cost of Bitcoin may either skyrocket the crypto market or cause a serious bearish trend. As a rule, crypto currencies are not backed by any central financial institution by contrast with fiat currencies like US dollar, Euro, Swiss frank, etc. Whatever the case, cryptocurrencies can gain their value on online crypto exchange platforms, henceforth increasing the value on the basis of supply and demand. In essence, the supply curve is dependent on how many new digital assets are mined and how many crypto holders are eager to sell their virtual currencies. On the contrary, the demand will propel based on how lucrative it is to own this or that crypto coin. To put it in a nutshell, the value of a cryptocurrency correlates with the market perception of its value at a given timeframe.
List of Factors That Influence Price of Crypto
Now we are back to the good part: what affects the price of crypto? The list of factors is undeniably long and requires a substantial analysis in order to illuminate all the intricacies connected with the topic under the discussion. We have tried to enumerate all key determinants in order to shed some light on what lies behind the curtain. Therefore, pour a glass of tea or coffee and get familiarized with the pivotal factors:
- Supply and demand
- Mining
- Halving
- Internal governance
- Crypto regulations
- Updates to the crypto code
- Media announcements, news, hype
- Scandals and rumors involving developers
- Whale investors
- Fierce competition
The only way to have an unbiased vision in what direction a virtual asset may progress or regress is by performing a fundamental analysis and stay informed with the current news and the industry trends. Below you shall find some of the pivotal influencers of the value of a cryptocurrency. Now, let us explain every factor in detail and digest the quintessence of the decentralized nature of cryptocurrencies.
Supply and demand
If there is a short supply of anything, its value will propel. Following this algorithm, the value is likely to go down if there is something in a great abundance, respectively. That is why, the lower the supply curve and the higher the demand index, the more crypto costs. The supply principle of each digital currency is well known because each cryptocurrency reveals its minting and burning initiatives. Here, the demand metrics can go up as a project gains brand or trademark awareness. Case in point, let us take DeFi and NFT projects. Their popularity is growing unprecedentedly whereas the aforementioned projects deploy Ethereum smart contracts. Stemming from this fact, the popularity and demand for Ethers is growing. People use Ethers for payments and the altcoin increases its utility. Demonstratively, the following widely popular NFTs run on the Ethereum network:
- Bored Ape Yacht Club (estimated market capitalization is 1,041,565.94 ETH)
- Azuki (estimated market capitalization is 125,147.08 ETH)
- CryptoPunks (estimated market capitalization is (420,226.45 ETH)
- Karafuru (estimated market capitalization is (12,991.06 ETH)
Mining
Crypto mining can oftentimes be very crucial in shaping the price of a cryptocurrency. In layman terms, mining is the process of online transaction validation by adding them to the digital ledger. If we take as an example Bitcoin mining, it proves that as of today, Bitcoin mining is very complex and requires a huge amount of resources, skills and investments. The supply of Bitcoins is limited therefore it is getting more and more difficult to mint new currencies for zillions of BTC miners.
Halving
Halving is the process of reducing the rewards for mining crypto after a certain set of blocks are mined. In the case of BTC mining, By reducing the rewards of mining every four years, the halving phenomenon limits the supply of new cryptocurrencies, thus creating an impulse for the price growth if demand is strong in the crypto community.
Internal governance
The internal governance for cryptocurrencies is necessary to guarantee crypto holders a bright and promising future for the chosen coin behind the project. This is conditioned by the fact that there needs to be a consensus among all stakeholders involved. Therefore, stable governance for digital currencies is more preferable because it backs up stable pricing and understanding of the future perspectives. The list of top governance coins by market cap is represented below (all the records are valid at the date of writing):
| Cryptocurrency | Price | Market Ca[italization |
| UniSwap | $5.12 | $2,352,753,732 |
| Aave | $87.64 | $1,217,093,399 |
| Decred | $37.10 | $524,576,360 |
| Compound | $67.66 | $466,391,844 |
| Yearn.finance | $9,890.48 | $352,311,237 |
| Sushi | $1.37 | $267,683,950 |
| PancakeSwao | $4.56 | $1,356,301,294 |
Source:https://www.coingecko.com/en/categories/governance
Crypto regulations
Considering the fact that cryptographic currencies are gaining tremendous popularity all around the globe, the likelihood that regulatory bodies and governmental institutions may pass new laws to regulate crypto-related transactions are very high. The governments do not appreciate unregulated and decentralized new mediums of exchange and are eager to impose taxation and maintain strict controls with regard to money flows. Regulatory concerns may either negatively or positively influence the price of cryptocurrencies. Let us take a fresh example of the crypto crackdown imposed by the Chinese government on all crypto-related activities in the country. This resulted in a rather prolonged crypto winter and market reorientation. The list of countries where crypto is prohibited by law* is presented below:
- China
- Turkey
- Russia
- Morocco
- Bangladesh
- Egypt
- Algeria
- Bolivia
- Colombia
- Nepal
- Vietnam
*NOTE: The list is not exhaustive and some countries may decide to legalize cryptocurrency operations under certain macroeconomic circumstances.
Updates to the crypto code
It is not a secret to anyone that virtual currencies are constantly upgrading and updating whereas new features are being introduced. These code updates are done in order to enhance the overall performance and boost the adoption of DeFi internationally. Exemplary, it is a huge update and event of Ethereum switching to the Proof-of-Stake consensus instead of the Proof-of-Work algorithm. In general, updates to the code are done in order to enhance the security infrastructure of the digital asset, speed up the transaction processing time and make it a flawless medium of exchange for all crypto enthusiasts.
Media announcements, news, hype
Media coverage increases the demand for crypto in an attempt to keep individual and institutional investors informed of the situation taking place on the crypto market. However, media can function on both sides, either pumping or dumping the market (a two-sided street). Any and all changes in factors occurring in the crypto industry are immediately published and can either send crypto to the moon or make it a pathetic shadow. Scandals, hacks, new partnership announcements and forging new business partnership relationships spread in the media outlets shape the coin price agenda and make it real talk of the town. Crypto related news can be spread virtually everywhere, from paper flyers to online forums:
- Newspapers.
- Social media networking sites.
- Blogs
- Forums.
- Video hosting platforms.
- Thematic websites.
- Email marketing.
- Press releases.
- Webinars.
- Online courses.
One bright example of the media influence is Elon Musk. With just one sentence posted on Twitter, he can either pump the crypto market (as it was with Bitcoin, Dogecoin, etc.) or make it a miserable place for every crypto addict. The powerful torrents of information can shape and re-shape the industry in the most idiosyncratic ways.
Scandals and rumors involving developers
The scandals surrounding cryptocurrency and blockchain projects can substantially impact the future of the promoted coin or company as a whole. Negative rumors like intentional bugs in the code base left by project developers can serve very menacing and ominous for a particular brand. Or, let us say, prosecution or litigation from regulatory authorities hunting particular developers may turn out to be a real catastrophe for the cryptocurrency development and adoption. Conversely, positive rumors about project developers may serve as an impulse for the crypto’s upward trend.
Whale investors
Those personalities who transact a tremendous amount of cryptocurrencies (buy and sell operations on crypto trading platforms or OTC trading platforms) are called whale investors. Only one purchase or sale of crypto can horrendously or positively influence the crypto price. Considering the fact that all crypto transactions are recorded on digital ledger, the fact that someone moved a few billion worth of crypto in a few transactions can be a real pain in the neck for all traders, investors, experts and analysts. What is more worrying is that no one can predict the timing when whale investors decide to buy or sell a lump sum of crypto. In the meantime, whale investors can intentionally shake the crypto market by following their short-term goals speculating on wild price swings. Money talks and there are few things that can speak louder.
Fierce competition
It is a fact that there are thousands of coins and tokens and the number of new ones being launched is shocking. Every project wants to create a unique product with fast execution time, top security measures and reasonable fee structure. All these factors bring up healthy competition among crypto projects leading to new project improvements and nifty functionalities.
Final Thoughts
To wrap it up, the value of a cryptocurrency is influenced by a cornucopia of various factors. We have managed to mention just some of the key players, but there are other turning points on the horizon like hard forks, global and local financial crises, number of nodes and market capitalization, among others. In order to know if it is worth it to invest your capital in this or that particular digital asset, it is of utmost importance to be well aware of the current trends, news and know the core principles of price formation.
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