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The general public’s interest in cryptocurrencies exploded after the sharp increase in Bitcoin price in 2017 with total internet searches for cryptocurrencies, especially Bitcoin, and cryptocurrency prices surging.
Many people couldn’t resist the urge to be among the early adopters who were sure of massive gains.
Even after the inevitable correction and a decline in crypto prices, investors who bought their coins just before the drop still saw the value of holding on to their investments.
Steep increases and unexpected dives in market price are not uncommon in the crypto market, here are some of the drivers of cryptocurrency value for those new to this asset class.
1. Demand and supply of cryptocurrencies
Demand and supply is the number one determiner of crypto prices. Like any other product, the lesser the supply of crypto coins, the higher the demand and price.
While you can’t predict supply, the number of available coins for trading and coin market cap are price determiners.
Crypto coins are created through mining or an initial coin offering. Cryptocurrencies are mined by computer experts using powerful computers that solve complex mathematical problems.
Since mining is difficult, developers can choose to launch a new cryptocurrency through an initial coin offering.
Cryptocurrency demand is the other determinant. Cryptocurrencies won’t have any value if there is no demand. Market prices of crypto coins increase with increasing demand.
Institutional interests and high-profile support drive up the demand and prices for cryptocurrencies. Demand for cryptos also increases if people need an alternative form of money transfer.
2. Competition
While Bitcoin and Ethereum are among the popular crypto coins, they aren’t the only cryptos available. They were among the first cryptocurrencies to hit the market. Currently, more than 8000 cheaper and established coins are in circulation. Competition among these crypto coins affects market prices as investors search for new opportunities.
Note that as new coins become popular, their demand and price also increase. For instance, the recent fluctuation in Shiba Inu prices is primarily because of its increasing popularity. New cryptocurrencies come with different selling points, such as better functionality or improved blockchain technology, which make them attractive to investors.
3. Legal regulations
Cryptocurrencies are not regulated primarily because cryptocurrencies aren’t based in one place. National authorities like central banks and financial regulators can’t set specific rules about digital currency. Some countries have banned Bitcoin and other top crypto coins for various reasons.
Government agencies, including the Financial Conduct Authority, have also introduced legislation aimed at guiding investors before sinking their savings on cryptocurrencies. These requirements also delegate the responsibility of conducting background checks on users of crypto exchange platforms.
Regulations are meant to give cryptocurrencies some legitimacy. They ensure that customers conduct due diligence before sinking their money into scam coins. These regulations can increase demand, as investors are assured of their investments. Similarly, prices can fall if regulations include banning crypto trading, as in China and India.
4. Production costs
Like other products and services, production costs are crucial to cryptocurrency market prices. Most people may not believe this because cryptocurrencies are exchanged online. However, mining these coins requires a lot of resources. For instance, Bitcoin is expensive because of the costs of electricity and buying mining infrastructure.
Several miners come together to solve complex algorithms to earn Bitcoin as a reward. Miners invest in expensive mining machines, electricity bills, and other accessories that should be recovered.
5. Market sentiment
Market sentiment is also an important determiner of crypto prices. This refers to the attitude towards crypto coins. A positive or negative attitude can drive the price of individual crypto coins and the market at large. In most cases, market sentiment is influenced by the actual fundamentals of the cryptocurrency.
For instance, investors were first attracted to Bitcoin and Ethereum because they offered a decentralized way of transferring money. They were also backed by established blockchain technology, which stores and tracks transactions. Social media buzz and news articles can also attract investors. For instance, dogecoin increased in value in 2021 when entrepreneurs and celebrities started tweeting about it.
6. Adoption in the market
Market adoption also increases the value of cryptocurrencies. Crypto coins become costly if they gain credibility in the mainstream financial sector. For instance, a new coin can become popular if shops and retail stores start accepting it as a form of payment for goods and services. Most investors rely on mass adoption before purchasing these coins.
7. Cryptocurrency exchanges
Cryptocurrency exchanges are platforms for trading (buying and selling) cryptocurrencies. The price of cryptocurrencies may vary from one platform to another.
Some also have trading fees that affect prices. Even though most cryptocurrency exchanges use the same technology to determine a fair price for these virtual currencies, the availability of coins in exchanges, demand, and interest can push up valuation. A price crash can also occur if there are investors rushing to sell their coins through the exchange.
8. Scandals
The cryptocurrency market is full of scandals and fraud alerts. Due to their increasing popularity, scammers can exploit novice buyers by selling them fake crypto coins.
Scammers sometimes create a new crypto coin and hype the price through social platforms and news before disposing of their stake and disappearing with investors’ money. Hackers can also infiltrate crypto exchanges or blockchains and steal or block traders. These scandals harm investor confidence and market sentiments, pushing the prices down.
9. Inflation
Inflation also affects cryptocurrency prices, though indirectly. An increase in inflation directly increases the cost of basic items, such as food and energy, and devalues fiat currencies. Bank savings often don’t earn much interest during inflation, making digital currencies a preferred savings option for most people.
