Since 2020 the cryptocurrency space has seen a massive boom across its numerous niches such as NFTs, DeFi, blockchain gaming, etc. The boom continued well into 2021 as well. In fact, some of the highest record-breaking numbers were seen this year.
Bitcoin reached an all-time high value of approx 63000 dollars before once again breaking that record on October 20th by reaching 66930.39 dollars. However, here’s what’s interesting. After Bitcoin peaked in March, it started dipping and went as low as approximately 29000 dollars by July, and within three months, it’s back again at the top.
The crypto space is known for its high volatility, and such events beg the question of how the price falls and rises so drastically. What factors influence the price of any cryptocurrency?
Factors That Influence The Price Of A Cryptocurrency
When it comes to cryptocurrency, numerous factors ranging from use-cases, market sentiment, supply and demand, and more are involved in determining the value of a cryptocurrency. Here are a few critical ones:
Use Case
When a cryptocurrency project is launched, one of the first things people look at is its use case. The question what purpose does this new cryptocurrency solve? is an important one for the people behind the project to answer.
Furthermore, it’s also essential for the potential audience or customers and crypto enthusiasts to understand that purpose, find it interesting enough, and be eager to invest in it.
However, it’s also common for people to jump on the bandwagon if they encounter an off-beat cryptocurrency such as Dogecoin or SafeMoon. The backing behind these cryptocurrencies is pretty strong despite the two having no tangible purpose.
But despite the community backing, experts believe that in the longer term, cryptocurrencies without a purpose would not be sustainable.
Supply And Demand
Another significant factor that dictates the price of any cryptocurrency is supply and demand. Numerous cryptocurrencies have a limited supply. This means if there’s a high demand and low supply, the price will increase, and on the flip side, if the demand is low and the supply is high, the value/price will decrease.
Cryptocurrencies are exposed to the network effect, wherein as more people become a part of the project, its value increases. Since most are userbase-driven, it is one of the critical factors that affect the price of cryptos.
Regulatory Standards And Rules
Numerous countries are currently debating and gauging the use of cryptocurrencies and their many pros and cons. Based on this, some countries have set regulatory standards which affect the value of cryptocurrencies.
This is because governments, through the laws, can limit the usage of cryptocurrencies, and depending on the use of the population, the prices can be affected.
For instance, in September, China banned the usage of any kind of cryptocurrency transaction by deeming them illegal. The majority of the Bitcoin miners were from China, which led to a drastic fall in the price of the said cryptocurrency.
This one simple example shows how governments’ laws and regulations can affect cryptocurrency.
Cost Of Mining
Cryptocurrencies have to be extracted and mined, which costs a certain amount. If the cost is higher, the fees for people transacting the cryptocurrency would also be higher, and as a result, the price will also be affected.
For instance, the Ethereum gas fee is pretty high due to issues such as network congestion. This affects the price of the cryptocurrency, which is currently the second-biggest cryptocurrency globally according to market cap. However, experts say that in the longer run, this might become a liability. People have already started using alternate projects such as Solana, Fantom Chain, Polkadot, etc., which provide a lower transaction fee.
Market Cap
The market cap usually indicates the popularity of a cryptocurrency, and the more popular the cryptocurrency, the easier people come to know about it and want to invest in it. However, it’s also essential to look at the factors that form the market cap.
Market cap is essentially the product of the current price of the cryptocurrency and the volume of supply in circulation. If the volume in circulation is exceptionally high, it becomes difficult for the cryptocurrency value to grow. Dogecoin is the perfect example of this. The value of 1 dogecoin is around 0.2 dollars, and its volume is about 131 billion.
This is just one of the reasons why it’ll be pretty difficult for Dogecoin to grow.
Conclusion
Mentioned above are a few factors that affect the price of any cryptocurrency. Besides these, there’s also market sentiment which affects the prices. This sentiment, however, can easily be swayed. For instance, every time Elon Musk tweets about Dogecoin, its price sees a surge. Therefore in real-time, there could be other factors such as current affairs, large volume transactions, etc., that could also affect the values of a cryptocurrency.