How To Understand Cryptocurrency Price Movements And Factors That Drive Them18 min read

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Cryptocurrency prices are notorious for their volatility. Moreover, there is a lack of clarity regarding price movements and the factors that impact the same. Bitcoin price fluctuation, for instance, may see a 5 or even 10 percent rise or fall on any given day. When it comes to other cryptocurrencies, the prices can be even more volatile. This means that cryptocurrency prices may often see higher fluctuations, on the upside or otherwise. 

Looking into bitcoin fluctuation in price, from the initial phases to present times, the extent of volatility becomes quite apparent. But how is the value of bitcoin determined? Bitcoin first became accessible to the public in 2009. After that, it gradually gained in popularity, 2010 onward. As a result, its value rose from less than a dollar to thousands of dollars within a few years. 

The Unprecedented Rise Of Cryptocurrencies

Cryptocurrencies have become extremely popular. They are attracting investors from all sectors around the world, from individual to institutional investors. In fact, the cryptocurrency sector saw tremendous growth in 2021. 

Crypto.com reported that globally, the number of cryptocurrency holders went up to 220 million by June last year. That is twice the number of users as compared to the previous year. 

What more? The crypto industry saw an overall investment of $30 billion. This level of investment in the cryptocurrency industry has not been seen before. As per reports, it is more than that in all the previous years put together. A Chainalysis report depicts the global adoption index, clarifying the skyrocketing global demand for cryptocurrencies. 

Image Source: Chainalysis

A Variety Of Factors Can Influence The Value Of Bitcoin And Other Cryptocurrencies

Several factors impact how the value of bitcoin is determined and what makes cryptocurrency go up. At the outset, it is essential to note that there are several types of cryptocurrencies. However, except for El Salvador, governments do not recognize them as a currency. Furthermore, even when it comes to recognizing them as an investment, most countries are conflicted regarding their stance. 

Without government backing and owing to their decentralized nature, it becomes vital to understand how cryptocurrency prices change. Cryptocurrency prices are impacted by factors such as supply and demand, speculation, existing government policies, statements in the media and by other influencers, and so on.

You may ask yourself why the cryptocurrency is so useful given its notorious volatility. The price of bitcoins can rise and fall in a few weeks or months from 5 % to 10% if the price increases. The smaller cryptocurrency has higher price volatility than the more powerful ecommerce currencies. In analyzing this article, you will determine how much cryptocurrencies value their value.

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Cryptocurrency Supply And Demand

What makes cryptocurrency go up or down in value is somewhat similar to what impacts the value of commodities, assets, investments, or other products. Demand and supply commonly impact the value of anything. Hence it is also what makes cryptocurrency valuable. It is important to note here that the supply of each cryptocurrency differs. 

When it comes to supply, different cryptocurrencies have different mechanisms. For instance, bitcoin has a fixed supply of 21,000 coins. However, other cryptocurrencies such as Ethereum do not have a limit on the supply. Some cryptocurrencies employ a ‘burn’ mechanism in order to restrict the supply of cryptocurrencies. 

Image Source: Appinventiv

So how does this determine cryptocurrency prices? 

As is the case with demand-supply, if the demand is greater than the supply, the price increases. The same applies here as well. An increase in the demand for cryptocurrencies is what makes cryptocurrency go up. As mentioned, the amount of cryptocurrencies in circulation depends on several factors. Further, if the institutional demand for a specific cryptocurrency increases, this tends to impact the price positively.

Internal Governance

Cryptocurrencies rarely follow static standards. Instead, the developer can customize a project according to community requirements. To change the governance of tokens, a stakeholder must have a consensus between them. For example, the Ethereum network was upgraded from proof-of-work systems into proof-of-stake systems that rendered much of the costly mined materials in data centers and basements unusable.

Media Coverage And Influence

The way in which crypto is being presented in the media is another aspect that can influence cryptocurrency prices. Several media outlets publish analyst reports, projections, and opinions. In addition to this, influencer opinions and promotions are other factors that impact the value of cryptocurrency. 

Take Dogecoin, for instance, which had been famously mentioned frequently by billionaire Tesla CEO, Elon Musk. The price of the meme-coin rose every time Musk mentioned Dogecoin on Twitter. He famously proclaimed himself ‘doge-father’ on the comedy show Saturday Night Live. 

News Developments

In the midst of an evolving bitcoin ecosystem, it is likely news events will directly affect Bitcoin prices. They can have different aspects. Regulatory updates may affect cryptocurrency prices significantly. Soft forks may change the amount of bitcoin available and may change investor perceptions of crypto currencies. 

The forking of Bitcoin’s blockchain in Bitcoin Cash in August 2017 caused volatility in prices and spurred the valuation of each coin. 12. The governance policies of Bitcoin affect the price of the product.

Image Source: Appinventiv

Regulatory Developments

Bitcoin was launched shortly after the collapse of the derivative trading market. Despite its relatively nonregulated nature, cryptocurrency is well known in its ecosystem for its lack of regulatory barriers to use. Despite Bitcoin not being recognized by any government, it has advantages and disadvantages. 

The lack of regulation allows it to run smoothly across borders and is also non-regulated as with any other currency. However, it is a matter of fact that Bitcoin usage and trading could have serious financial ill effects on a wide variety of financial jurisdictions.

As mentioned, Bitcoin’s limited supply is one of the driving factors in its increasing value. An additional aspect here is that of bitcoin investors. It is well known that a handful of wealthy investors hold a large amount of bitcoin’s supply. In 2017, 40% of all Bitcoin was owned by 1000 people. 

Naturally, this changed over the years as an increasing number of investors joined the Bitcoin bandwagon, whereas the cryptocurrency’s supply rose as well. Despite this, a handful of investors still own a large supply. 

Bitcoin holders who own a large proportion of the crypto, to the tune of millions of dollars or more, are known as Bitcoin whales. A report published in June last year specified four billionaires to be Bitcoin whales. 

More recently, a Bitcoin whale reportedly bought as many as 2.7K Bitcoins, amounting to about $6 billion at the time. Undeniably, these large investors do impact the volatility of Bitcoin’s price to an extent. The more they accumulate, the further up Bitcoin’s price will go. Whales are typically long-term investors. However, if they decide to sell their Bitcoin holdings, the prices will likely collapse. 

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Mass Adoption

The price movements in cryptocurrency markets go up as they gain popularity and more acceptance in markets. This single formula explains why Bitcoin prices have risen over these years.

Secure Cryptocurrencies

The prices are protected by the cryptography of the codes that have been encrypted by open blockchain technology. All of the owners are provided with a key for each of these. So no one except the holder can access this private key.

The encryption used to create this encrypted secret key is extremely strong, and it has huge numbers that can be broken easily. This makes cryptocurrencies so secure and has the potential of being used without dreads of security.

Inflation Of Fiat Currency

If the price of FIX currencies drop, the price of cryptocurrencies rises. It’s happening because cryptocurrency will give you the ability to acquire more money.

Image Source: Appinventiv

Whales

The whale is the Bitcoin wallet that carries a total sum of about $1 billion. They are difficult to set price objectives with cryptocurrency. The crypto market is largely dominated by ten large whales or privates, as Wimmer explains: “They have a great amount of space in the market. Developed with bitcoin wallets, the current cryptocurrency prices are going to be the biggest revolution in the market.”

Scarcity

Scarcity refers to a limit mechanism for cryptocurrency. The economic system believes stable supply in a particular commodity increases its value in the long term as demand increases. The result is in the shortage of the scarce currency in circulation. Various coins even use burn mechanisms to destroy part of the supply. This, in turn, improves coins’ values since there is a lower supply of coins.

Irreversible Transactions

Cryptocurrencies often cause inconvenience by requiring the irreversible payment of funds. If you use Bitcoin, you must provide confirmation before a transaction occurs. When we confirm, the transaction begins. To control the crypto-based price, a person must be responsible for confirming a transaction.

Cryptocurrency Exchanges

Cryptocurrencies, including Bitcoin and Ethereum, are traded by a wide array of trading platforms. Nearly every cryptocurrency exchange lists its most common tokens. However, certain tokens are available on a select platform that can restrict access to certain investors. 

Some wallet providers aggregate quotes on any cryptographic currency exchange between several exchanges, but these are charged, which costs more investment. Another issue is that when cryptocurrency is exchanged only in small markets, a spread is likely too large for some investors.

Cost Of Production

As for other commodities, production costs are crucial for bitcoin’s price. Bitcoin prices in the crypto markets correlate closely with its corresponding marginal production. Bitcoins are generally produced by an indirect cost associated with difficulty in mining the cryptocurrency and direct fixed costs associated with infrastructure and electricity. 

Bitcoin mines consist of miners competing against each other in solving maths – the first miner who reaches that goal wins a bonus of newly created bitcoin. The transaction fees accumulated over time are paid back by the transaction.

Competition

Although bitcoins are the most widely known cryptocurrency, many tokens compete for crypto money for their own value. By 2021, Bitcoin will dominate the cryptocurrency market. Despite that, their dominance is diminishing over the years. In 2017, Bitcoin represented over 80% of the total cryptocurrency market value. In 2021, it dropped to 50 %. 5. This is primarily a result of increased recognition of alternative currency options. Ether is among the most popular cryptocurrency tokens on the list of decentralized financial services.

It seems unclear who is responsible when regulating cryptocurrency trading. Securities and Exchange Commissions say cryptocurrency is similar to stock and bonds. The commodity futures trading Commission says it is commodities like coffee. 

The two parties have no jurisdiction over cryptocurrencies. The decision may improve the cryptocurrency market while creating broader access to cryptocurrency products. Regulations are needed to make cryptocurrency trading easier.

Exchange Listings

Major cryptocurrencies such as Bitcoin and Ether are listed on all the cryptocurrency exchanges. In case of other smaller cryptocurrencies, being listed on a major and well-known exchange can lead to more investors buying. This leads to an increase in demand and a rise in its value. An interesting phenomenon in relation to this is something known as the ‘Coinbase effect.’

Coinbase effect is simply the skyrocketing of cryptocurrency prices upon being listed on Coinbase, a cryptocurrency exchange. This occurrence was observed for a cryptocurrency known as Cardano (ADA) when it got listed on Coinbase in March last year. According to an analyst, “Coinbase listings have the highest average return standing at 91%, but also have the widest distribution, ranging from -32% to 645%.

Regulation And Government Policy

Governments worldwide have typically been skeptical about acknowledging cryptocurrencies as valid means of investment. That is why most countries do not have policies in place to govern this sector. Due to a lack of regulations, volatility in prices cannot be kept in check. 

Certain regulatory bodies, such as the Securities Exchange Commission of the United States of America, believe cryptocurrencies are securities. However, there is another school of thought that deems cryptocurrencies as commodities. 

As a result of this, many investors shy away from investing in Bitcoin and other cryptocurrencies. Furthermore, whenever there is news of the government’s policies in relation to cryptocurrencies, it impacts the value. 

China’s blanket ban on cryptocurrencies is one example of this. This was one aspect that led to a drop in crypto prices last year. On the other hand, a wave of optimism spread across Bitcoin users all over the world, as El Salvador became the world’s first country to adopt Bitcoin as currency officially. Naturally, this impacted Bitcoin prices positively and led to a collective euphoria across the cryptocurrency industry. 

The Bottom Line

Although it’s been around for ten years, Bitcoin remains an emerging asset. This means the price of the product depends heavily on multiple factors such as costs for production competition and changes in regulations. Unlike other cryptocurrencies, the technology behind these is important for their price.

A deeper look at cryptocurrency prices and what makes cryptocurrency valuable shows the constantly shifting trends within the industry. Thousands of new projects have populated the space, and newer phenomena continue to appear. 

Concepts such as Decentralized Finance or DeFi and NFTs or non-fungible tokens, in addition to blockchain gaming of GameFi, are coming into the picture and rapidly occupying space in the industry. It is safe to say that the cryptocurrency industry, still in its nascent phase, continues to evolve.  

Image Source: IG.com

Furthermore, factors that impact price movements and what makes cryptocurrency valuable are also evolving. It is therefore important to keep an eye out on the trends and movements in the industry. Consulting legitimate experts on understanding cryptocurrency and making the best investment decisions can be one way of gaining authentic knowledge.

It is important to have a decent understanding of the factors that impact value and its fluctuations. So get a good look at the demand and supply dynamics, government policies, investor trends, and other factors weighing in on cryptocurrency prices rising and falling over a period of time. 

Frequently Asked Questions

What Is Blockchain?

Blockchains are digital records that share recorded information. This is a record of transactions for each cryptocurrency unit that shows how ownership changes. Blockchain is an electronic record that records transactions as blocks.

How Does Blockchain Work?

Blockchains are incredibly simple and straightforward at their most basic level. In essence, it is a shared database that has entries that have to be verified and protected. Imagine the file in this way as an encrypted shared Google Document in which each page is connected by a logical relationship to the previous. Furthermore, blockchain technology allows users to create secure & efficient logs on all their sensitive information, including everything from international payments to shareholder records.

What Is The Meaning Of Cryptocurrency?

Cryptocurrencies are digital currencies that use cryptography to allow secure and anonymous transactions. Bitcoin really helped a lot with the evolution and growth of crypto during the late 2000s.

What Is Cryptocurrency Trading, And How Does It Work?

Using cryptocurrency trading, you can speculate over currency prices using CFD accounts or buy or sell an asset or coin on an exchange platform.

What Is The Difference Between Cryptocurrency And Fiat Currency?

The largest comparison factor between cryptocurrencies vs. fiat currencies is their support. The fiat currency is supported by the central government, and its value comes from having been declared as valuable when the central government has put the trust of its parties in its value.

In fiat currencies, central banks control everything that is supplied and thus inflation in general. On the other hand, cryptocurrencies were introduced because the government had no control over spending money on the private sector. Since they are limited by supply, inflation has virtually zero effect on their prices.

What Is Cryptocurrency Mining?

Cryptocurrency mining processes a cryptocurrency that checks transactions and creates new transactions on blockchains. The mining machine selects the pending transactions in the pool and checks that the senders have enough cash for completing the transaction. These transactions are monitored against the transactions history stored on the blockchain.

What Is Cryptocurrency Market Fundamental Analysis?

Fundamental analysis (FA) is used to determine the intrinsic value of an item. They determine if resources have been undervalued or overvalued based upon external or internal factors. Investors can use this information strategically to enter or leave positions. Crypto fundamental studies involve drawing attention to the data that reveals financial resources.

What Is A Crypto Wallet?

The cryptocurrency wallets include desktop wallets, mobile wallets, digital wallets, mobile wallet hardware, and paper wallet.

What Is A Pip In Cryptocurrency Trading?

Pip is a unit that reflects price change for cryptocurrencies and refers to one-digit movement in their value at one level. Generally, the value of crypto is traded in dollars. For example, a shift between $190.00 to $19.00 would indicate the cryptocurrency moved one pip. Nonetheless, some lower-value cryptocurrency is traded on a different scale, and one pip can be one cent.

What Is The Spread In Cryptocurrency Trading?

Spreads represent the difference between the prices offered to buy the cryptocurrency, and the price offered to buy the cryptocurrency. Like all financial markets, the cryptocurrency market has two price levels.

If one wants to open long positions, the trader should buy at the market value, which can be quite higher than the market price. Conversely, when you wish to open short positions, it’s possible to trade for the price of the sale, which is just below the market.

What Is Margin In Cryptocurrency Trading?

Margins are crucial to leveraged trading. This term describes the first deposit you make when you open and maintain leveraged positions. If a crypto trader is regulated in their own market and trades with an exchange broker, you may need an increased profit margin. Margin is usually expressed in percentages.

What Is Leverage In Cryptocurrency Trading? 

The use of leverage is to gain exposure in the cryptocurrency industry with little or no upfront fees. Instead, you pay a small deposit called a margin. If you have closed leveraged positions, your profit will depend on the total volume of transactions. While leverage increases profits, it increases the risk of amplified loss, including losses exceeding your profit margin.

What Is A Lot In Cryptocurrency Trading?

Typically, cryptocurrency is traded on lots of crypto tokens to normalize the volume of trade. Since cryptocurrency is extremely volatile, many are usually very small; many are merely a unit from the crypto base currency but in some cases, cryptos trade in larger volumes.

Will Bitcoin’s Price Increase?

With Bitcoin reaching its limit, demand for cryptocurrency should grow. Stronger demand and limited demand have led to an increase in bitcoins in circulation. Moreover, the Bitcoin market has stabilized and become popular as an investment tool. Therefore, the utility of cryptocurrencies and prices increases with increasing popularity.

How Can I Predict Cryptocurrency Prices?

Technical and fundamental analysis are used to forecast crypto market movements over a long time. Although fundamental analysis looks at economics, company or safety techniques gauge cryptocurrency price movements based on past market data, historical prices, or the volume seen on the price charts.

Is It Safe To Invest In Cryptocurrency?

Cryptocurrencies are a value investment that involves a combination of risks and uncertainties. No one has guaranteed a successful investment by investing in crypto.

How To Buy And Sell Cryptocurrencies Via An Exchange Platform?

The money is credited directly to you by buying the currency through exchanges. You will need to open an exchange account in order to open an account. It is advisable to learn how to interpret data exchanges, in a nutshell, to be more efficient in terms of terms. Some exchanges limit the amount of money that can go into, while accounts can become costly.

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