There are innumerable cryptocurrencies in the crypto market right now. An increasing number of investors and even ordinary people too are investing in cryptocurrencies. Have you ever wondered about the increasing demand for cryptocurrencies? Since the regular currency you use or that is in wide circulation is generally recognized as legal tender, the demand, usage, and purchasing power determine the value of these regular currencies. But cryptocurrencies are not like that. Only a few nations have acknowledged them. They cannot be as widely used to purchase commodities. Then what are the factors that determine the price? Why is cryptocurrency still so famous despite lacking all the qualities a normal currency possesses?
This article clears all of these doubts and more regarding the same. You must have wondered about the same questions at least once. Scroll through the article to clear them all today. Some people argue that these are all unnecessary discussions. But everything is important, and this too equips you with strong knowledge and awareness to deal with the real-time price challenges of the cryptocurrency.
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Factors that influence the value of cryptocurrencies
1. Competition
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As has been mentioned, there are innumerable cryptocurrencies in circulation in the crypto market. A lot more tokens, coins, and other digital currencies are adding up to the pile each day. The entry barrier is relatively low for new cryptocurrencies. That is why the competition increases each day.
In a normal financial market, the regular currencies do not have competition in most cases except on the global stage. Because national currencies are a monopoly in nature, only one currency is approved by administrations. The reverse is the case for cryptocurrencies. Hence, the competition adds up to the value of cryptocurrencies. More the competition, the higher the price.
2. Governance
Although there are no global or even local (in most cases) regulatory and governance mechanisms in place for regulating the crypto market and cryptocurrencies, local and global governance does impact the value of the crypto market. Some countries are imposing more and more restrictions each day, and some more are embracing the currencies more openly. This is just one dimension of the issue.
Despite the opposite and agreement, almost all country people are actively investing in cryptocurrencies. But, the nature of local governance either inspires or demotivates the quality and quantity of investments similar to the regular financial market. Hence, governance does have a say in cryptocurrency value.
3. Cost of production
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Unlike regular tangible currencies, there is not much cost of production incurred for cryptocurrencies. But that doesn’t mean it can be entirely ruled out. Mining and verifying the mined cryptocurrencies require computing power. The software, creation, and other costs too cannot be ignored altogether. So, all these comprise to influence the value of cryptocurrencies.
4. Regulations
Bitcoin is not a regulated digital currency. While some nations have openly adopted it, a few others have banned it. While some others are not sure about its status, citizens of these nations are not demotivated by any factors to not invest in it. The prime reason is a lack of regulatory mechanism and authority in place to overlook the price changes. It is causing a drastic change in the price range of bitcoin.
Lack of appropriate regulation means there is no one or organization to moderate the price falls and rises, which causes the uncontrolled behavior of the price and cost of these currencies.
5. Supply and demand
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The volatility of any currency is inevitably intertwined with the supply and demand present in the market. The same case applies to cryptocurrencies, including bitcoin. The bitcoin supply is currently limited, while the supply has been consistently and unprecedentedly increasing without any signs of slowing down anytime in the future. Any mismatch in the supply and demand graph is bound to show its impact on the price volatility.
The more the gap or mismatch, the more volatile bitcoin prices are bound to fluctuate. The gap is widening day by day. Rest you can infer from the case laid.
6. In news
Bitcoin is always in the news for one reason or another. While its volatility majorly occupies the news headlines, there are other reasons too for the bitcoin to make it to the front page. For example, celebrities and public figures like Elon Musk are always vocal about the happenings in the crypto industry. Their proactive behavior and performance is one thing that hypes up the cryptocurrency and bitcoin.
Predictions and price changes are another reason why bitcoin is always in the news. Anything that occupies news always intrigues the audience, investors, and traders. This is another good reason why bitcoin is volatile and fluctuates frequently.
Conclusion
It is impossible to fare well in the crypto market either as an investor or a trader without certain information or awareness. That includes the factors influencing the price of cryptocurrencies. Even the most experienced people sometimes ignore such essential information and avoid brushing up their knowledge. But eventually, you will have to bear the brunt of it.
That is why hold this knowledge dearly and refer back to it whenever necessary. These are just a few factors, though. Cryptocurrencies are highly volatile because, similar to legal tenders, otherworldly and social issues have repercussions on cryptocurrencies too. Since you cannot master them all, it is essential to possess this much basic knowledge.
