Cryptocurrencies are highly volatile assets, whose price is known to suddenly and dramatically fluctuate. The most popular cryptos such as Bitcoin (BTC) and Ethereum (ETH) can have a price swing of several percent within a single day, but many less popular tokens can have a price change of several tens of percent within a short time span.
Unlike company stocks which mostly change the price a few percent over several months, crypto is much more volatile, which means traders can earn considerably more profits from trading cryptocurrency than stocks, in a much shorter period of time. This of course is only possible if a crypto trader manages to make all the right moves in terms of buying cryptos when their price is low and selling when the price is high. However, digital currencies are very susceptible to sudden price crashes and a trader can easily lose a lot of money fast on the crypto market.
There are numerous factors that contribute to the price of cryptocurrencies and learning to read these factors is of high importance for successful traders. Let’s take a look at which factors form the price of cryptocurrencies.
Factors That Influence Crypto Prices
There are dozens of factors that can directly or indirectly influence the price of cryptocurrencies to some extent, however, these 7 factors are considered to carry the most weight regarding crypto prices.
Supply and Demand
Supply and demand are of key importance for a cryptocurrency’s price. Most cryptos have a predetermined number of coins, also known as a hard cap. For instance, the Bitcoin hard cap is 21 million coins, but some other popular cryptos like Ethereum don’t have a hard cap and an infinite number of coins can be put into circulation.
The developer teams behind crypto projects always pay close attention to the market demand for their coin and that’s why they usually implement a self-regulating inflation mechanism that makes mining or minting new coins more difficult over time, in order to keep their crypto scarce and more valuable. If certain crypto has lots of coins in circulation but low market demand, then the price of the coin is surely going to stay quite low. On the other hand, if there’s a scarce amount of coins on the market, but there’s a high demand for those coins, the price is surely going to stay consistently high like in the case of BTC.
The more people accept a certain cryptocurrency as a valid financial asset, the more its popularity grows, along with its price. If a cryptocurrency doesn’t have a strong user base that utilizes its functionalities, it can hardly achieve any considerable price increase.
Use-cases and real-world utility are very important for the market valuation of a cryptocurrency. Providing people only with digital cash services worked for Bitcoin because it was the first crypto on the market, but all other digital currencies need to provide some authentic and useful functionalities to their users in order to become popular and increase in value. A solid development roadmap, along with clear accomplishments is something that considerably contributes to a crypto’s price.
Some cryptocurrencies are quite hard to acquire because you need to create an account on a less popular exchange platform to buy it or it supports a less known blockchain network that isn’t compatible with popular crypto wallets. In these cases, a lot of people just don’t want to go through all the hassle and rather choose crypto that is more easily available to purchase, either through their wallet or through a popular exchange platform. The Zelcore wallet is a great example of a crypto wallet that supports thousands of tokens and coins across various blockchains, making all of the most popular cryptocurrencies available for users, along with the possibility of direct crypto purchases through the Zelcore app.
That’s why crypto availability is an important factor in a token’s price. The easier it is to get hold of a cryptocurrency, the more people will choose to acquire it and contribute to its price.
Media Coverage and Community Support
Media coverage, especially social media can make or break a cryptocurrency. Getting good reviews from crypto influencers on YouTube and having a positive media buzz on Twitter and Facebook can really push a crypto’s popularity up, along with its price. However, the process can also go downwards if a crypto project has many issues and the developer team is unresponsive.
Additionally, community feedback is also an important factor for a cryptocurrency’s price. Discord is considered a key crypto community hub and if developers rile up the Discord community of their project, they can easily have a price crash that originated from the community’s dissatisfaction.
Pumps and Dumps
Pumps and dumps are a very annoying but realistic factor for crypto price changes. This is a trading tactic designed to create a crypto bubble by placing an enormous amount of purchase orders for certain crypto, by organized trader teams or trading bots in order to inflate a currency’s price. Once the price is sufficiently inflated, the party responsible for the pump suddenly cashes out those massive purchases, which results in a price crash for that specific crypto. The only ones who benefit are the people who organized the pump and dump, while the rest of the holders suffer a loss, due to the sudden price crash.
Cryptocurrencies aren’t immune to real-world events such as economic and political turmoil. For example, when China banned cryptocurrency mining in 2021, the global Bitcoin hash rate temporarily went considerably down, which negatively affected both Bitcoin and the rest of the market.
Monitoring these factors helps crypto enthusiasts and traders alike in anticipating crypto price fluctuation, but it’s important to keep in mind that there’s no decisive factor that can be considered as the most important when it comes to forming crypto prices.