4 factors that determine the price of cryptocurrencies

crypto

Although cryptocurrencies are not fully understood yet, they’re fascinating to analyze because they’re not dependable on only one thing. Their value is determined by many factors, which can be unfavorable for investors and miners as well. The blockchain they’re powered by also matters because it’s better to invest in Bitcoin or Ethereum rather than an unknown cryptocurrency; it’s safer, and even if it doesn’t incentivize you as much, you can have a solid base for your portfolio. But let’s see what makes the price of crypto rise or fall and how you can use such metrics to your advantage.

Demand and supply

In each market, the price fluctuations are based on the demand and supply rule. You may know that the supply of a product can affect its demand and vice versa, and the same thing applies to cryptocurrencies too. For example, if there’s a supply shortage for a coin, but it’s highly demanded, the price will increase. In such a situation, if you really want to buy, you’ll need to offer even higher prices to earn something.

On the other hand, if a cryptocurrency is low-demanded but abundant, the price will decrease. Sometimes, this is a good sign for someone who has just started to invest, but the rule of buying low and selling high is not efficient anymore. If the price is low, it might be so because its value is lower, and its worth can be close to nothing.

Still, you need to find a balance between these two situations and look for cryptocurrencies with a relatively good value, but the purchase allows you to have some funds aside. And don’t be driven by the fear of missing out on an important asset for now because the market can always shift back and provide better investment opportunities.

Market cap

Market capitalization is the coins’ overall value mined until a certain point. Bitcoin, for example, has 18.5 million mined coins until now, but a total of 21 million can be used until Bitcoin is too challenging to mine for investors to earn something. This is the expected scenario, but we still don’t know if this will happen when the first cryptocurrency reaches its end. On the other hand, other cryptocurrencies, such as Ethereum, have an unlimited coin supply, with over 120 million coins in circulation. Still, it has a yearly limit of 18 million coins, giving it the potential to be deflationary.

When investing in a cryptocurrency, looking at the market cap is essential because this is what reveals its true value:

  • When a cryptocurrency’s market cap is more than $10 billion (like Bitcoin or Ethereum), you’ll know it’s safe. Older cryptos that have demonstrated they can withstand a higher volume of people cashing out through time without impacting the price too much are less risky for your portfolio. These are called large-cap cryptocurrencies.
  • When the market cap is between $1 billion and $10 billion, there’s a little more risk of investing, but these coins are considered underdeveloped but with potential. They’re called mid-cap cryptocurrencies.
  • Finally, cryptocurrencies with less than $1 billion are known as small-cap, and they’re the most prone to risks because they’re less stable;

 

Knowing what coins you’re investing in is crucial because if your portfolio is not diversified, you’re exposing your funds. You may want to start with large-cap crypto, so follow the Bitcoin price for buying and selling at the right time.

New developments

Not all cryptocurrencies offer a decentralized way for payments. Some of them, like Ethereum, provide more than that by allowing users to create new applications and code on smart contracts, which puts this blockchain at the top for a long time. Another Ethereum-related example is the latest innovation called the Merge, which changed its mechanism forever from proof-of-work to proof-of-stake, making it more sustainable and faster than the previous version.

At the same time, since cryptocurrencies consume a lot of energy for users to mint, people turn to more sustainable alternatives, which is why more green coins have emerged on the market. Some of the most popular are:

  • Chia is using a proof-of-space and time consensus, therefore reducing e-waste through secure reuse of storage;
  • Cardano is the first blockchain to implement the ouroboros protocol that provides the means for a redistribution of power and control;
  • Nano performs without the need for mining. Instead, it uses an innovative voting system which uses less energy;
  • Stellar is using its own consensuses protocol and a proof-of-agreement mechanism that is designed to lower the carbon emitted while mining;
  • Algorand partners with ClimateTrade to make their blockchain more efficient;

Media posts

This is one of the most important factors because what the media says will influence investors’ opinions and make them buy or not an asset. You must remember what happened to Dogecoin, the meme cryptocurrency, after Elon Musk made a tweet about it. So Doge’s value increased in only a few hours by 10%, which was enormous for a blockchain that had just entered the market.

Of course, this won’t always be the case because when other celebrities share their opinion on certain cryptocurrencies, no one is really interested since they’re not experts in this field. Still, Elon Musk was already popular in the world of technology and innovation, so this made people think he knew what he was saying.

There’s an issue with talking about cryptocurrencies on social media because more people would want to make a profit from creating courses to increase their targeted audience but will spread nothing but useless information. The lack of knowledge of cryptocurrencies will also contribute to poor investments, which will eventually create a supply or demand somewhere not needed.

Final thoughts

Cryptocurrencies are yet to be understood because they’re relatively new to people. Compared to the prices these days, coins were cheaper back then because there were fewer people interested, but now, since many blockchains are filled with users, the prices are more susceptible to fluctuating. This is not a bad thing, but you still need to make sure you’re not falling into the trap of investing all your money in crypto, at least not as a beginner.

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