Cryptocurrencies are fundamentally volatile and as such, their value remains a mystery to a lot of people deemed as outsiders of the cryptocurrency community.
So, what drives the value of cryptocurrency? There are factors that can help determine the value of cryptocurrency. Let’s look at a few of them:
Supply and Demand
Supply and demand are a big factor that determines the value of anything that can be traded, including all digital currencies. For instance, if more people are willing to buy Ether, than others willing to sell them, the price will go up. Price will go down should the reverse be the case. With the supply of many cryptocurrencies being capped, prices of popular cryptocurrencies will go up.
This is a measurement of the acceptance of the cryptocurrency. This can be determined by conducting a search on the internet and sometimes through data/information provided on the website for the cryptocurrency. Token holders also ascertain the strength of the cryptocurrency’s community. The more holders, the stronger the community which in the long run is a factor that determines the sustainability of the cryptocurrency in times of crisis.
This plays into the demand and supply factor.
It’s common knowledge that if an asset gains mass adoption, it gains significant value. The same applies with cryptocurrencies. Take Bitcoin, for example, its total market supply is limited, and with its everyday use case increasing with time, it will continuously lead to a direct increase in value.
In short term, if the utility and usage of a cryptocurrency increases, its demand rises, which, in turn, increases its value.
The words or tweets of high-profile figures can be external factors that influence the value of a cryptocurrency. In May 2021, Elon Musk drove up the value of dogecoin through his anticipated appearance on Saturday Night Live and also reduced its slump in July 2021 through a tweet. He however, sparked a price dip of more than 4.5% in bitcoin after he suggested he was “breaking up” with the cryptocurrency.
The call for regulation on cryptocurrency continues to be on the rise. If this were to happen, it will simply result in digital money being centralized and as a result, impact the value of a cryptocurrency. Take for example the recent fluctuation in Bitcoin price the past week where China issued a ban on cryptocurrency transactions, only for a week after, the U.S Federal Reserve Chairman Jerome Powell, issued a counter-statement where he said the US has no intention on banning cryptocurrency.
With all these combined factors at play, it makes it difficult to accurately predict the price of cryptocurrencies, but it does make it interesting for traders and investors in the cryptocurrency market.