Cryptocurrencies are digital currencies that exist on what’s called a blockchain. This is an distributed ledger similar to a database that records transactions of various types, including cryptocurrency transfers. There are many reasons why the prices of cryptocurrencies rise and fall, this blog post will explore the 9 factors that causes cryptocurrency prices to rise and fall.
Cryptocurrencies are not controlled or governed by a central authority or government, which means that the value of different currencies is determined in what’s called a free market. The way this works is that when demand for cryptocurrencies increases, then their prices rise and if demand decreases, then cryptocurrency prices drop.
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9 Factors That Causes Cryptocurrency Prices To Rise And Fall
The scarcity of cryptocurrencies will intensify with the decreased supply, pushing up the prices, The supply of cryptocurrencies is what ultimately affects their value.
There are a fixed number of Bitcoins that can be mined, with the amount being 21 million coins. This means that there will never be more than this number in existence and it ensures scarcity, which is what ultimately causes prices to increase. When you have increased demand but low supply, what happens is that the price rises, but this may not always be true.
The supply of cryptocurrencies can also come from what’s called inflation, when there are too many coins in circulation then their value starts to decrease. When this occurs, prices drop due to the lack of demand for these currencies when people start losing faith in them, which is what causes a decrease in prices.
Demand for a certain cryptocurrency is what ultimately affects its price. For cryptocurrencies to rise in value, what needs to happen is that demand from the market must increase. For example, if there are very few people who own Bitcoin and only a limited number of retailers accept it as a payment method, then what will be able to raise prices is when more people start buying this coin and the increase the number of businesses and retailers that accept it as a form of payment.
Demand may increase if people want to buy more of these digital currencies or they could decrease because there are not enough buyers.
When demand for cryptocurrencies increases, then the value rises, however, this does not always happen and it can go either way. The reason why prices goes up when demand increases is because there is a limited supply of these currencies and what happens when demand increases is that more people want what’s already scarce.
If demand for cryptocurrencies decreases then their price will decrease as well. Cryptocurrency value tend to fluctuate due to investors speculation, which is what people do when they buy and sell cryptocurrencies in the hope of making a quick profit. If demand decreases because fewer people want to invest in these cryptocurrencies then prices will drop as well.
3. Cost of Production
Mining is the process through which new cryptocurrency tokens are created. Using a computer to validate the next block on the blockchain is known as cryptocurrency mining. Cryptocurrency’s ability to function is due to the decentralized network of miners. In exchange, the protocol generates a reward in the form of cryptocurrency tokens.
Computing power is required to verify the blockchain. In order to mine cryptocurrency, participants must purchase expensive equipment and electricity. Miners are rewarded for their efforts with cryptocurrency tokens. The cost of mining will always be in flux, and it is a major factor that affects the price of cryptocurrencies.
The Cost of Production is what ultimately determines or affects the prices of cryptocurrencies as this is what miners need to cover in order to maintain operations. Miner’s rewards come from the cryptocurrency tokens that are created as a result of mining, and this is what helps to ensure that there will always be new cryptocurrencies in circulation.
The Cost of Production can either make cryptocurrencies more valuable or less valuable, it all depends on how much it costs miners to produce coins relative to the rewards they’re given. If the cost of production is high, then it’s more likely that the price of the cryptocurrency will be low because the rewards given to miners will not be enough. On the other hand, if the cost of production is low then it’s more likely that prices will be high because miners can make a profit.
Cryptocurrency prices can also be affected by the amount of competition that exists within the market. Since multiple digital currencies are competing for attention, it becomes difficult to ascertain which one will emerge as the dominant force. When it comes to competition, Bitcoin is still king.
Bitcoin has the first-mover advantage and is currently the most popular cryptocurrency. Ethereum, Litecoin, Cardano, Binance Coin and Monero are all competing for second place. These digital currencies offer unique benefits that could potentially dethrone Bitcoin as the top cryptocurrency coin.
Ethereum is what’s known as a smart contract platform, which allows users to create decentralized applications on top of the blockchain. Litecoin was created with speed in mind, whereas Monero focuses more on privacy. All cryptocurrencies are competing for market share and trying to differentiate themselves from one another.
Read Also: How does Cryptocurrency gain value
5. Cryptocurrency exchanges
More exchanges listing a cryptocurrency can increase the number of investors ready and able to buy it, hence raising demand. And, when demand grows, so does the price.
The listing of a new cryptocurrency on an exchange can result in an immediate price increase as investors buy up the coin in anticipation of future profits.
Cryptocurrency prices can also be affected by what’s happening on cryptocurrency exchanges. When there is a problem with an exchange, it can have a bad effect that causes the entire market to suffer. Cryptocurrency exchanges are vulnerable to hacks and thefts.
6. Internal governance
Internal governance is what determines what the daily price fluctuations will be. Cryptocurrencies are not controlled by a central authority, so there are no regulations to dictate how much they should change in value on any given day. This means that it’s up to each individual cryptocurrency community to decide what their coins’ worth at any time and this can play a part in what causes cryptocurrency prices to rise and fall.
The internal governance of a cryptocurrency can either help or hinder its price. For example, if the developers of a coin are doing a good job and have a clear roadmap for the future, then it’s likely that prices will be positive. On the other hand, if there is infighting within the community or no clear vision for the future, prices will likely be negative.
7. Regulatory Developments
Cryptocurrency prices can also be affected by regulatory developments. When governments make announcements about their stance on cryptocurrencies, it can cause the price to either go up or down.
For example, when China announced that they were banning ICOs (initial coin offerings), the market reacted negatively and the price of all cryptocurrencies went down. This was primarily due to the fact that China has a huge market and is one of the biggest investors in cryptocurrencies.
On the other hand, when South Korea announced they were legalizing ICOs, it caused cryptocurrency prices to rise again because this was seen as a positive development.
Governments have begun to take notice of cryptocurrencies and are starting to formulate regulations around them. This will have an effect on what causes cryptocurrency prices to rise and fall in the future.
8. Advancing blockchain collaborations
The blockchain is what makes cryptocurrencies possible and it’s what underpins their entire system. As the technology advances, so too can cryptocurrencies prices be positively influenced by these advancements.
For example, when Microsoft announced that they were partnering with Bank of America to utilize blockchain technology, cryptocurrency prices shot up significantly because this was seen as a major development.
Due to its growing popularity, the blockchain idea is gaining ground in a variety of industries. The demand for cryptocurrencies will definitely lead to a price increase as a result of increased awareness and slow adoption.
9. Market volatility
Cryptocurrency prices are incredibly volatile and can fluctuate drastically from day to day. This is because the market is still relatively new and it’s difficult to predict what will happen next.
When there is a lot of news or hype surrounding cryptocurrencies, prices tend to be more volatile as investors make quick decisions based on rumors and speculation.
The price volatility of cryptocurrencies can be attributed to many factors – here are several examples:
- Media influence – what is reported in the news can affect prices, for example, negative reports of theft and fraud associated with cryptocurrencies might cause demand to drop quickly.
- Economic factors – if there are economic problems such as high inflation rates, then this could lead to cryptocurrency prices rising as investors try to move their money into what they see as a more stable asset.
- Technological factors – developments such as an upgrade or new software can lead to changes in supply and demand, which leads to price fluctuations.
These are just some of the factors that can cause cryptocurrency prices to rise and fall. It’s important to remember that no one factor is definitive and that multiple factors can work together to create price fluctuations.
There can be many factors that cause prices to rise or fall. It’s important to pay attention to these things as they happen when you invest in the coin of your choice.
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