If we had to make a list of some of the top volatile elements of the world, the one name that would top even Mercury is Cryptocurrencies.
Ever since their launch in 2009, cryptocurrencies have found themselves being counted as one of the most fluctuating and volatile topics of the world seeking to get to the bottom of what is cryptocurrency.
There is hardly any investment enthusiast who has not tried to crack the code of why cryptocurrencies fluctuate and how to take that understanding and convert it into insights that would make the investment successful.
While the industry has managed to make itself one that is extremely difficult to gauge in terms of cryptocurrency price movement, let us try to decipher how the price of cryptocurrency changes in the market by understanding how and why the cryptocurrencies move.
But let us first start by drawing parallels between Cryptocurrencies and Fiat Money.
Cryptocurrency vs Fiat Currency: How the Two Compare Against Each Other
The biggest comparative factor that stands between the cryptocurrency vs fiat currency debate is their backing. The fiat currencies are backed by the central governments and its value are derived from the fact that central government states it has value and then the parties transacting in the value are putting their trust in them. In the case of fiat currency, central banks control the entire supply of money and thus inflation.
Cryptocurrencies, on the other side, was brought into existence to not let central government have the autonomy to regulate the funds of an individual. And because they have a fixed supply, the devaluation through inflation is next to nonexistent.
Apart from this, both cryptocurrency and fiat currency come with similar characteristics: they both can be used as the medium to exchange services and products and they can store value.
Why Does Cryptocurrency Prices Fluctuate So Much?
A single statement answer to the question of what drives cryptocurrency price movement would be – because it is still a nascent stage.
Being a market that is yet to find its set of logical use cases, cryptocurrencies are still at a very nascent stage. And the result of this newness is the high volatility in the industry, which is majorly driven by the heightened experiments that investors make to get a sense of how the prices fluctuate.
Factors That Affect The Changing Cryptocurrency Values
The factors affecting price of cryptocurrency could range from the scope of cryptocurrency application in the present day to the future uses of cryptocurrency coin and a series of other linked elements falling in the development of the cryptocurrency space. Here are some of those reasons that bring about a cryptocurrency price movement in the market
1. Utility of the Coins
Let us look at Ethereum as an example to explain it further. For executing the commands and developing applications on the Ethereum blockchain, one would need to have ETH to convert into gas and represent the ‘fuel’ of Ethereum.
Thus, the more the people who execute transactions and develop applications, the more would be the demand for ETH and greater would be the prices. In short, the bigger role of cryptocurrencies, the greater would be the cryptocurrency market cap.
Scarcity denotes the finite mechanism of cryptocurrencies.
In economics, a stable supply of any item increases its value in the long term for it is assumed that the demand would also increase. This, in turn, creates a scarcity for there are only a few coins in circulation. Some brands even use a burning mechanism, which means destroying a part of the coin supply. This in turn, increases the coin value for there is lesser coin supply.
3. Assumed Value
A cryptocurrency can only be as valuable as the market deem fit and the market values it on the basis of factors which are at the center of the project development. Here are some factors that determine the value of projects –
- One that constantly achieve the milestones mentioned in its whitepaper
- Partnership and collaboration with credible companies
- Launch of MVP or beta version
- The growth of the cryptocurrency market
4. Deflation of Fiat Currency
When the price of fiat currency declines, the price of cryptocurrency would automatically go up with respect to that currency. This happens because you would be able to get more currencies with your cryptocurrencies.
5. Mass Adoption
Driven by the sentiment that the more a product is demand, the greater would be its cost, the cryptocurrency price movement goes up with greater adoption that it sees in the market. This one formula has been the core reason behind the rise in prices of Bitcoin. So the more use cases a coin will see (like in case of Bitcoin) the greater would be its overall cost.
As the term denotes, Whales are those Bitcoin wallets that have around $1 billion in them. They make it very difficult to put any price target on the cryptocurrency. Per Wimmer, the founder of Wimmer Financial LLP, explains: “The crypto market is dominated mainly by ten big whales or privates. They are massive in the market and take up a lot space and volume so if you take the top 10 or even 50 you will have a lot of the volume covered already. It is too easy to manipulate the market so far”.
One way these ‘whales’ fuel price manipulations is through the rinse and repeat trading technique. Under this approach, a whale carrying huge crypto holdings begins selling them at lower than the market rate, which in turn causes a panic situation where small-time traders start selling off their holdings. The whale, meanwhile, waits through the panic state till the cryptocurrency value reaches rock bottom. And just when the price is low, they swoop in and buy more cryptocurrencies.
Besides these factors, if there is one thing that is and would continue to affect the cryptocurrency price fluctuations greatly is the regulations’ set. Presently, the speed at which governments are passing out regulations are limited to a huge extent, thus keeping cryptocurrencies reaching their mass adoption potential. But the more regulations, the greater would be the adoption and thus the rise in cryptocurrency prices.