Cryptocurrencies are assets that have no intrinsic value, yet there is no shortage of people willing to invest in them. They are often defined as virtual currencies, but their payment function is just one of many. This means that there are several factors that influence the value of cryptocurrencies, and these need to be considered when and how to invest in them.
While traditional assets used for investment, such as stocks or commodities and currencies, rely on numerous economic factors for their evaluation and long-term price formation, cryptocurrencies definitely break away from this model.
What Influences the Price of Cryptocurrency?
Why is it periodically referred to as a bull market and then as a burst speculative bubble? Well, many economists argue that there is no connection between any economic factors that could influence investors’ behavior and their decision to buy cryptocurrencies and, therefore, affect the price of virtual currencies. Their prices depend on investors’ sentiments and actions. Assessments made by investors on cryptocurrency exchanges, where such assets are sold, are entirely based on past returns and information from the media that they receive. Emotions when investing are often a poor guide, but they affect the evaluation of individual cryptocurrencies.
Many scholars and experienced investors believe that cryptocurrencies, although perhaps not all of them, are typically speculative instruments. Exchange rates operate on the law of supply and demand, which are the basic market mechanisms. The higher the demand and the lower the supply of a currency, the higher its price will be. Therefore, the limited supply of BTC, set at 21 million units in the manifesto of its creator Satoshi Nakamoto, has a positive impact on its valuation.
When Does the Price of Cryptocurrency Increase?
Why can Bitcoin be worth up to $60,000 per 1 BTC and then fall to an estimated level of $20,000? The price of cryptocurrencies increases when investors positively evaluate the value of a cryptocurrency platform or project associated with the coin. Bitcoin remains one of the most important cryptocurrencies in the world. It is called digital gold and maintains high valuation thresholds.
Actions of major investors also speak in favor of the cryptocurrency. For example, when Tesla CEO Elon Musk started speaking positively on social media about Dogecoin, which is actually a cryptocurrency created “for fun,” its price suddenly began to rise sharply. Sometimes, just one statement or a larger purchase of a particular cryptocurrency by a “well-known face” is enough to drive its price up.
When Does the Price of Cryptocurrency Decrease? It is often associated with the general risk aversion exhibited by investors in various markets. They then abandon riskier assets, such as cryptocurrencies. Therefore, when macroeconomic factors have a negative impact on investors, they transfer their funds to so-called safe assets, such as gold or US dollars, and avoid cryptocurrencies, among other things. As a result, the value of crypto decreases.
Fluctuations in cryptocurrency prices downwards can also be associated with the rising costs of coin mining. In the case of bitcoins, machines with high computing power are required for mining. These machines, in turn, are costly and consume a lot of energy, which affects the exchange rate of virtual currencies.
Hacker attacks on exchanges and losses by investors due to the large number of cryptocurrencies stored in a virtual wallet are another factor causing a drop in the price. If the platform or network in which cryptocurrencies operate is poorly protected and therefore highly susceptible to cyberattacks, its coins become less profitable, and therefore cheaper.
When Should Fluctuations in the Cryptocurrency Market Cause Concern?
The prolonged decline in major cryptocurrencies that investors faced in 2022 should certainly concern those who work in this market. On the other hand, when asked how to invest in cryptocurrencies, it should be said that it is worth buying them when they are as cheap as possible.
Being the owner of a cryptocurrency and observing that its price is highly volatile, you need to find out what is really causing such fluctuations and choose the most favorable moment to withdraw all your investments. Large fluctuations indicate that perhaps the investor is dealing with a speculative bubble, which quickly bursts when “inflated” to the limit, and the cryptocurrency needs to regain its strength over a longer period of time.
