To be an informed crypto-investor, it is important to understand the factors that determine cryptocurrency’s value. I hope this guide helps you mitigate some of the risk when trading in crypto markets.
Supply and Demand
Supply and demand are a big factor that determines the value of anything that can be traded, including all digital currencies. For instance, if more people are willing to buy BTC, than others willing to sell them, the price will go up. Price will go down should the reverse be the case. With the supply of many cryptocurrencies being capped, prices of popular cryptocurrencies will go up.
Mass Adoption
This plays into the demand and supply factor.
It’s common knowledge that if an asset gains mass adoption, it gains significant value. The same applies with cryptocurrencies. Take Bitcoin for example, its total market supply is limited, and with its everyday use case increasing with time, it will continuously lead to a direct increase in value.
In short term, if the utility and usage of a cryptocurrency increases, its demand rises, which, in turn, increases its value.
External Drivers
The words or tweets of high-profile figures can be external factors that influence the value of a cryptocurrency. In May 2021, Elon Musk drove up the value of dogecoin through his anticipated appearance on Saturday Night Live and also reduced its slump in July 2021 through a tweet. He however, sparked a price dip of more than 4.5% in bitcoin after he suggested he was “breaking up” with the cryptocurrency.
With all these combined factors at play, it makes it difficult to accurately predict the price of cryptocurrencies, but it does make it interesting for traders and investors in the cryptocurrency market.
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