Since many new investors wonder what makes crypto prices fluctuate, let’s explore the most common reasons.
Competition Between Tokens
Even if you’re not a cryptocurrency trader, you probably know that cryptos are extremely volatile. It means that their prices often change — they go up and down all the time. Sometimes, you have to be very quick and well-informed to make a profit from crypto trading.
Right now, there are literally thousands of cryptocurrencies in the world, and hundreds are actively traded. Even though Bitcoin is still on top, other digital coins shouldn’t be neglected, as they all compete on the cryptocurrency market. In other words, some cryptos may lose in value if others gain, as traders might decide to sell one and buy the other. At the moment, almost all cryptos depend on Bitcoin price, but that can change in the future as well.
Therefore, to understand why the price of a certain cryptocurrency changed, analyze how other cryptos traded at that time.
Energy Consumption
The Bitcoin network currently requires energy that’s equivalent to the energy consumption of Argentina, which is a lot. Put differently, there’s a production cost, and it takes up a lot of electricity due to the way BTC mining works. As more miners join, mining new bitcoins will become even more difficult, affecting the overall BTC price. This also applies to other cryptocurrencies.
Supply and Demand
All trades in the world follow the law of supply and demand, and cryptocurrencies are not an exception. Simply put, if many investors want to buy certain crypto, its price will go up. If there are not enough interested buyers, the price will go down. This also works because most cryptocurrencies are scarce. It means there’s a finite number to them, and not a single additional crypto could be produced once they are all mined.
Legal Aspect
Cryptocurrencies are still not regulated in many countries. Some governments are actively working on finding the best possible legal frameworks. Whenever there are some actions, they affect Bitcoin’s price (and, subsequently, the prices of many other cryptos). Big legal changes are yet to take place, meaning there will be big ups and downs in crypto value. Make sure to follow the latest news and stay up to date with crypto’s legalization process, especially in big countries.
Changes in Governance
Bitcoin and many other cryptos use a distributed ledger. They are governed by a decentralized entity consisting of nodes, each node being a miner who gets to vote and take part in governing the network. Sometimes, there are minor differences in how the network operates, and that can affect the price of cryptocurrencies.
These changes maybe not be so minor. Perhaps, the best example is the hard fork that resulted in the creation of Bitcoin Cash. These things happen from time to time, and it’s always wise to learn more about them as soon as they take place. Thus, you can plan how to adjust your trading strategy accordingly.
Enlisting on Exchanges
Exchanges play an important role in crypto prices. First of all, they are great sources to learn more about the latest price changes.
Since some cryptocurrencies are available on more exchanges than others, more traders can access them. This affects their price. Sometimes, the sole fact of getting enlisted on a big exchange will increase the price of a cryptocurrency. However, that’s just one of the several exchange-related events that influence it.
Hype
The first time that the price of BTC peaked in December 2017, it was because media around the world reported on this, attracting many inexperienced investors to buy Bitcoin and other cryptocurrencies. We all know that didn’t end well for those who invested too little, too late. Hype is a powerful tool that can affect the price in both ways. It may be deliberately used to attract investors who aren’t really familiar with the basic investment rules and patterns.
Final Thoughts
To sum up, many elements affect the price of cryptocurrencies. You have the Internet and access to all the information necessary to stay informed and understand how they influence the market. This should ultimately help you adjust your crypto trading strategy and predict fluctuations.
