2024-09-30 08:43:35
The cryptocurrency market is very volatile, with price fluctuations representing real opportunities for traders and holders of these currencies. To better speculate on cryptocurrencies, it is however important to understand how they work and to master the factors that explain their volatility. This is the key for any trader looking for performance and profitability. Through this article, we take stock of the various factors that influence the value of these digital currencies. Let’s discover them together.
The main factors influencing the price of cryptocurrencies
Analysts agree that the main elements influencing the Bitcoin price in dollarsor various other cryptocurrencies, it is the law of supply and demand and the game of competition. We explain why.
Supply and demand
Indeed, as they are adopted and increasingly used as methods of payment or store of value, cryptocurrencies increase in value. Thus, the higher the demand for a particular cryptocurrency, the more value it will gain in the blockchain and in the financial system. But with low demand, it should not be surprising to see its value fall on the market.
The game of competition
Just as basic economic principles explain, some cryptocurrencies can increase in value due to the competition they are exposed to from other cryptoassets. This is for example the case of bitcoin. Since its launch and its growth, hundreds or even thousands of other cryptoassets have been put on the blockchain market. Among the best known, we find dogecoin, ethereum and solana. Furthermore, there are also certain cryptoassets which have been specially created to limit bitcoin or other currencies in their rise.
Therefore, as in any competitive market where there are different companies and various products, the good performance of some can affect the performance of others, and vice versa. Cryptocurrencies are therefore not only in opposition to traditional money. They are also the subject of a “war” between them, which explains their constant volatility.
So, when a token loses interest in the public eye, it is sometimes because other tokens have developed new features and found favor in the eyes of many. This will contribute to the loss of value of one token, and the gain in value of another, and therefore to fluctuations in the prices of various cryptocurrencies.
Other elements that can influence the value of cryptocurrencies
Other points, more in the background, also influence the price of cryptocurrencies. We are thinking in particular of the volume of exchanges, the cap on the number of cryptocurrencies in circulation on the market, and the complexity of the “mining” process allowing new ones to be created. We tell you more below.
Compared to other global financial markets, the cryptocurrency market remains relatively “young” and underdeveloped. This results in low trading volume overall, and makes the market more vulnerable to fluctuations. Indeed, the less money there is invested in a market, the more unstable it is.
The limited number of cryptocurrencies in circulation contributes to this phenomenon. Since the amount of cryptocurrencies available is capped, the market remains restricted, reinforcing fluctuations.
That said, it must be emphasized that the production of each cryptocurrency is a complex process, and it has a cost. Indeed, each cryptoasset is created by a process called “mining”. Just like mining, these are expensive machines that consume a lot of electricity which are used in the creation process. And that’s not counting engineers, energy, mining and the entire crypto-sphere workforce (the miners). Furthermore, to mine certain cryptoassets, engineers must solve a host of complex cryptographic equations. This results in limited creation of cryptocurrencies, which also helps keep the market smaller and fluctuations larger.
In short, cryptocurrencies are not banal electronic creations. Their cost and price vary depending on these many factors. There is also the news of each currency which can influence its love or dislove by the public, and therefore generate fluctuations.
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