Crypto Frontline

What Affects the Price of Cryptocurrencies?

What Affects the Price of Cryptocurrencies?

What Affects the Price of Cryptocurrencies?
November 11
08:23 2017

Cryptocurrencies or digital currencies had revolutionized the financial system in the past few years and because a lot of people are using them, a question arises: What gives them value? The answer to that question is The people.

Cryptocurrencies are valuable just because people believe that. There are some digital currencies that are backed by gold, for example, but if people won’t trust them, their value would be zero.

Reasons why price fluctuates

In terms of the reasons why a cryptocurrency’s value fluctuates over time, we have assembled a short list of reasons that have an impact on the price.

  • Supply/demand – similar to usual currencies, the price of cryptocurrencies is influenced by the constant order flow.
  • Energy used to secure the blockchain – Let’s stick to bitcoin for a second. Mining one bitcoin gets more and more difficult, thus requiring more hardware capacity, thus more energy usage. Since it takes more energy to generate one bitcoin, it is clear that the price also increases.
  • Perception of value by the wide public – how the people relate to a certain currency is also an important reason for price fluctuations.
  • Investors – big investors’ remarks also can influence the price of a certain currency.
  • Innovation – any significant improvement in a certain system that makes the currency more efficient can also contribute to the evolution of price.
  • Government intervention – lately, some communistic countries had begun to ban the use of cryptocurrencies, which can also influence the perceived value.

Also, the price of cryptocurrencies had been very volatile in the last two or three years and a reason for that matter is the reduced liquidity from the industry, compared to the forex market or stock market. Keep in mind that low liquid environments tend to be more volatile and that is another critical aspect that you should carefully consider.