How are cryptocurrencies prices determined?

pamella97 (21)in #cryptocurrency • 3 years ago

Let's look at the different factors that affect the value of cryptocurrency

When Bitcoin’s price exploded in late 2017, so did the interest of the general public in cryptocurrencies. Internet searches for Bitcoin, cryptocurrencies, and crypto prices skyrocketed. Many people weren’t able to resist the fear of missing out on the massive gains the early adopters were experiencing as crypto prices rose quickly. When the inevitable correction came and crypto prices fell, those who bought towards the end of the bull run immediately saw the value of their holdings halved. Despair and anguish followed, but the enthusiasm of the crypto community hasn’t faltered.

Steep rises and unexpected dives in the price of cryptocurrencies are relatively common. As the market stabilises, the volatility has slowly decreased, but irrationality will always be part of the trading game.

In this article, we’ll analyse the different factors that affect a cryptocurrency price.

Supply and demand drives crypto prices

Cryptocurrencies either have a limited or predetermined coin supply—although, with over 2,500 cryptos listed on hundreds of online exchanges, a number which is sure to increase over the coming years, it’s hard to generalise.

The process is more complicated than this, but when most coins are mined, the mining rate decreases so that the total supply is only replenished to account for lost units. If you’re aware of basic economics, you’ll know that supply and demand determine prices. For the sake of our discussion, let’s consider supply to be limited or highly restricted.

When that’s the case and demand increases, the price of that underlying asset goes up. Roughly speaking, this is the simplest way to address how the prices of cryptos fluctuate.

We’ll go through the several factors that influence demand for a particular crypto, but before we do that, it’s important to note that cryptocurrencies don’t fit comfortably into our existing asset categories.

Some security tokens are linked to an external tradable asset, and you can feel relatively comfortable assessing them as a more volatile relative of traditional shares, perhaps using a similar framework to the one you’d employ for penny stocks.

Other tokens, known as utility tokens, are only meant to be used within the context of a particular network, so they can’t even technically be classified as tradable assets in the same manner of security tokens.

As we don’t know exactly how to classify them, it’s difficult to attribute a direct causality to a specific factor and a crypto’s rise or dive in value.
Media coverage

There are several online news outlets dedicated to covering all cryptocurrency developments alongside active community forums which dissect every feature of every project. Developers across these projects are aware of the influence media can have on the perception of a crypto’s value.

Often, they coordinate with these outlets and have a few moles in the forums whose sole purpose is to get people excited about their projects so more start buying their coins, causing the price to rise.

Pumping and dumping

As a result of the relationship between supply and demand, the price of a cryptocurrency can be manipulated to an extent. A concerted effort to match all the open orders on a particular crypto across several exchanges will create an artificial shortage.

When the market adjusts, the price shoots up. Large holders of that crypto can then cash in on the gains by dumping their coins, bringing the price down. Although exchanges know about these methods, stopping them isn’t all that simple, as the perpetrators know how to stay under the radar.
Marketing schemes

Some teams have no issue with leveraging the power of social media by paying influencers to promote their coins. With a few heavy hitters on your side, you can spread rumours nearly instantly. If people are talking about your project, you win.

Community support

One of the most valuable assets a cryptocurrency can have is an active, engaged community which is fully on board with the team’s vision.

When formed by real members instead of bots—we’ll get to that in a second—these communities are unofficial and unpaid public relations departments continually working in favour of the reputation of the projects they support.
Trading bots

With the rise in artificial intelligence and automation, armies of trading bots can theoretically be used to push a crypto’s price up by creating an artificial demand for the coin. As always, you should do some research to make sure any crypto you’re thinking of investing in isn’t being artificially boosted by bots.

Innovation

Active developers who continuously push out new features and regularly hit the milestones of their company’s roadmap do not go unnoticed in the crypto-sphere. If the market thinks your team innovates like no other, people will soon start buying your tokens, and their price will increase.

Regulation

When the spectre of restrictive regulation hovers over the cryptocurrency markets, steep drops invariably occur. If it happens to concern China or the US, brace yourself if you’re an investor—the market never stops trading, and what took months to build can crumble to nothing in an afternoon.

How are cryptocurrencies prices determined?

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