What Makes Cryptocurrency Go Up and Down?
13 Setembro 2021 - 6:56AM
Finscreener.org
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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