CryptoWhat Determines the Price of a Cryptocurrency?

What Determines the Price of a Cryptocurrency?

Volatility is known in the crypto market; a coin can go from $500 in the morning to $250 in the afternoon.

While this is inherent, crypto traders, enthusiasts, and investors must understand how a cryptocurrency’s volatility and price are determined. In their bid to be updated about the price of cryptocurrencies they are watching, some investors use a coin price tracker.

Well, that is a story for another time, as we will be looking into what determines the price of a cryptocurrency and how volatility in the crypto market works.

What is Crypto Volatility

To effectively understand what determines the price of cryptocurrencies, you must learn how volatility affects the crypto market.

Just like other financial markets, such as the stock market, the volatility of an asset has to be measured first to determine if it is worth investing in or not. In terms of volatility, the one experienced in the crypto market is more frequent and unpredictable. Bitcoin can be at $21,000 in the morning and then go up to $25,000 in the next few hours.

The definition of volatility in the crypto market is quite simple; it is a critical way of determining the risk in the crypto market. Knowing the asset’s volatility level and the factors that determine the price help you make a better investment.

To further understand, the volatility of a cryptocurrency is just the description of how fast the price of a crypto asset can change within a certain period. It is a measure of rapidity and is calculated according to the annual returns of a crypto asset within a year over a specified period.

Using Bitcoin, as an illustration, this means that the volatility of Bitcoin is calculated according to the annual returns of Bitcoin over one year, two years, or another specified period.

So, investors now look up volatility indexes whenever they want to invest in major cryptocurrencies such as Ethereum, Bitcoin, and Litecoin. It is crucial to look up these indexes because it will help them understand how risky it is to invest in some cryptocurrencies.

Even more important, investors need to understand what influences the cryptocurrency price they are about to purchase. The reason is that it will help them know if they stand the chance of making profits, how relevant the cryptocurrency will be, and the risk of the investment.

What Factors Determine the Price of cryptocurrencies

The price of Bitcoin or Ethereum doesn’t just move from a certain amount to another; certain factors influence its price.

Community And Social media Frenzy

Anybody who has developed or created a crypto project in the past will easily tell you how vital communities are.

Come to think of it, how can a crypto project succeed without having a group of people that like the project and pushes for its success? How big and strong the community of a cryptocurrency directly influences its price in the bull and bear market.

The community of a cryptocurrency also shows the number of people that are using the cryptocurrency, directly or indirectly. This is one of the reasons why crypto project developers create social media communities to help push for the adoption of their cryptocurrency.

Yes, a social media frenzy has proven that it can directly influence the price of a cryptocurrency, even other blockchain technologies such as NFTs. No doubt that enough funds are kept for social media advertisements and promotions because the more a cryptocurrency trend on social media, the more its price is affected.

However, if a cryptocurrency is trending for the wrong reasons, there are chances that its price will decline. Twitter is the major social media platform used to trend cryptocurrencies for positive and negative reasons.

An excellent example of how social media frenzy can affect the price of a cryptocurrency can be seen in the case of the pioneer meme coin, Dogecoin. The founder of Tesla and SpaceX, Elon Musk, made some tweets about Dogecoin, and the price went up to more than 10,000 percent of its value.

Supply – demand and Tokenomics

Just like any other financial asset or market, a cryptocurrency’s demand and supply directly influence its price.

First, one should note that the more a financial asset is available, the less valuable it will be, although there are exceptions. However, the exceptions are few, as major cryptocurrencies with unlimited supply usually have lower prices than those with a limited supply.

Therefore, as an investor or a newbie crypto trader, it is always recommended to check a cryptocurrency’s total supply as it will hint at how its value can be affected.

As said before, there are exceptions since Ethereum has an unlimited supply and has been increasing in value over the years.

The total supply is part of the tokenomics of a cryptocurrency; other things make crypto tokenomics, such as circulating supply and market cap.

Apart from the total supply, as explained above, the circulating supply for a cryptocurrency also plays a massive role in determining if it will have a positive price change or not. Assuming that the number of a cryptocurrency in circulation is about 15 percent of its total supply, then there are chances that it will decrease in value as time goes by.

A token with a 15 percent circulating supply has about 85 percent reserved; its value will start dropping as more of it is released. There are exceptions to this, but it is a significant factor in determining a cryptocurrency’s price.

Real-life Applications and utility

With more crypto enthusiasts and investors getting informed, no one wants to buy a cryptocurrency with no real-life applications or utilities.

From another point of view, the more a cryptocurrency has different use cases, the more its price is likely to increase.

For instance, the pioneer crypto, Bitcoin, has been adopted by many major companies and countries such as El Salvador as means of payment for some goods and services. This affects the current price of Bitcoin and its price in the future. The reason is that when a cryptocurrency proves that it can be used to solve real-life problems, its community increases.

When the cryptocurrency community increases, it means that there are people who are interested in the solutions it provides, which influences its price.

Apart from Bitcoin, Ethereum is another cryptocurrency that has proven that it has a real-life use case, thus its appreciation over the years. The problem that Ethereum majorly solves on the blockchain is trying to create a network and financial suite that a third party will not control.

These applications and solutions that Ethereum provides have made many people adopt it and invest in it. When a group of people continues to invest in a cryptocurrency because of the solutions it offers and its use cases, its price is influenced positively over the years.

Regulations

The price of cryptocurrencies changes when regulations are imposed on them by countries or influential organizations in the world.

Each time there are regulations, the price of cryptocurrencies usually goes down and can last for a long time. Sometimes investors evaluate how risky it is to invest in a cryptocurrency by how it can survive during regulations.

An excellent example of the tool regulations on cryptocurrencies was when China banned Bitcoin mining and the SEC issued with 2017 ICOs. This led to the price of Bitcoin going down during those moments, and other tokens seemed to follow when Bitcoin was down.

However, it seems that regulations’ effects on the price of cryptocurrencies usually last for some time, and more cryptocurrency bans are being lifted. It has been announced that Google has accepted cryptocurrency advertisements, and in 2020, India lifted its ban on cryptocurrencies.

Adoption and Increase in the number of investors

You can tell whether the price of a cryptocurrency is going too far on the negative or positive side by its adoption rate.

How fast crypto is adopted within and outside the crypto community tells if the price will increase or not.

For a cryptocurrency like Ethereum, it is almost indispensable to the crypto industry because of how fast it has been adopted in the crypto industry and even outside. This is one of the reasons why the price of Ethereum has continued to increase yearly despite the bear market.

Talking of adoption, the number of people investing in a cryptocurrency is one of the things that determines its price. The more people are investing in a cryptocurrency, coupled with other factors, its price will likely increase. When a cryptocurrency has a small or nobody investing in it, it will die out immediately or lose value as time goes by.

Assuming that people stop buying BNB and making transactions with it, its value will likely go down.

Wrapping Up

There are many things that a crypto enthusiast and investor need to know; one is knowing what determines the price of a cryptocurrency.

It will help you know the cryptocurrencies to invest your money in and determine how risky each investment is.

Regulations, tokenomics, adoptions, and Real life applications are some factors affecting a cryptocurrency’s price.

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