If you’ve already dipped your toes into crypto trading, you’ve probably experienced this first-hand, but even beginners know that cryptocurrencies are an extremely risky asset. Well, aren’t all assets risky?
While you’re not far from the truth, the facts that cryptocurrencies are still not recognized as legal tender or enjoy the status of a widely accepted payment method add to their volatility and unpredictability.
On the other hand, it’s exactly the ups and downs that cause the adrenaline rush for most investors, not to mention the rewarding profit for the most persistent ones. For example, the Robinhood (NASDAQ: HOOD) users could definitely relate to that in the recent past.
The Main Factors That Affect the Value of a Cryptocurrency
Let’s take a closer look at the five most influential factors that cause cryptocurrency to rise or fall in value.
Supply and Demand
The key factor when it comes to any type of trading asset is the supply and demand law. In the case of cryptocurrency, the demand is even more affected by the usually limited coin supply.
Bitcoin, for instance, was hard-capped before it was launched to only 21 million BTC. Once they’re all mined and in circulation, a sudden increase in demand will drive the price upwards in the blink of an eye. However, Bitcoin is designed in such a way that its mining difficulty automatically readjusts itself so that the rate of mining new bitcoins doesn’t skyrocket when more miners join in.
Global Adoption and Media Attention
One scenario that would trigger an increase in demand is cryptocurrencies getting accepted as global currencies. The surge of people buying crypto would cause their prices to go way up. Still, in order for this to happen, more retailers and businesses should accept cryptocurrency as a regular means of payment.
On the other hand, there can be other scenarios that cause a decrease in demand such as negative media press. If a cryptocurrency is suspected to be a scam or if there has been a hacking incident, traders who own the asset would try to sell it as fast as they can, causing its price to drop. Conversely, there have been many cases when a popular figure has boosted the sales of a digital currency or lowered it.
Software Updates
Whenever the cryptocurrency blockchain gets ready for a new software update (also known as a soft fork), the demand for that cryptocurrency goes up. This is especially true if the update in question aims to resolve issues such as scalability and transaction throughput, like when Bitcoin’s price rose by 13% within 24 hours due to the activation of the SegWit protocol.
Competition and Fiat Inflation
If Bitcoin remained the only cryptocurrency on the market, its price would probably be even higher. But then came Ethereum (ETH), Litecoin (LTC), and even its forked competitor, Bitcoin Cash (BCH). The incredible choice of over 1,000 different digital currencies and tokens is another factor that causes prices to stay low, as crypto investors aren’t fixed on one asset only.
US While market analysis shows that fiat currencies have a weak influence on cryptocurrencies, sudden fiat currency price drops can boost the sales of major cryptocurrencies like Bitcoin because investors tend to turn to them as a hedge against fiat inflation. If you want to see this correlation in action, simply observe the performance of the BTC/USD trading pair over a period of time.
Regulation
Cryptocurrency price volatility owes much to existing regulations and the lack of a universal framework. This atmosphere creates uncertainty, as investors aren’t sure what rules to follow or how to report their crypto gains and losses. New government proposals directly affect the demand for crypto and, consequently, their price.
Key Takeaways
So, how should one approach cryptocurrency investing, when all these factors (and more!) can influence the value of their assets? Approach it with a clear head and a well-devised strategy that calculates both the risks and the potential for accruing more profit through your investment.
By now, you should know that there’s no risk-free asset, so you should look for one whose usability and overall performance excel over the rest. There’s no use trying to predict the exact fluctuations of an asset’s price, as there’s no way to be sure which way it’ll go.
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