These factors that influence cryptocurrency prices up and down

These factors that influence cryptocurrency prices up and down

Cryptocurrencies such as Bitcoin, Dogecoin and Shiba Inu are attracting attention due to their dramatic price fluctuations. In the following article, you will find out what factors influence the prices of these cryptocurrencies.

Whether alternative currencies or “meme coins”, cryptocurrencies have rapidly gained popularity in Switzerland. It is the prices of Bitcoin & Co in particular that are regularly talked about, when the prices of these virtual currencies reach new heights or, on the contrary, when they suddenly collapse.

However, what are the factors that most strongly influence the price development of these cryptocurrencies? You will find out in the overview below.

  • Marketplaces

For a cryptocurrency to be assigned a price, it must be possible to buy and sell it for money. The possibilities of being able to trade cryptocurrencies and the number of places where it is possible to do so are also factors that influence their price. This effect is particularly marked when it comes to new currencies and tokens that are not yet widely used.

When a major marketplace offers a new currency to trade, it signals to potential investors that it is of interest to a wide audience. At the same time, many people now have the possibility of buying this currency. Also, it is often more advantageous to trade cryptocurrency when major exchanges agree to do so.

This is why the prices often increase when the first major platforms begin to offer a currency in their offer. This is particularly the case when there was already a demand but this demand could not be met – for example, because in a given country there was no marketplace offering trading in the desired currency or because it was very tedious to buy the tokens otherwise.

  • Infatuation

The craze, or ” hype ” in English, that is created around a certain currency is an important driver of demand for cryptocurrencies. Indeed, the ” meme coins ” do not have any intrinsic value in themselves – except precisely certain emotional aspects which can trigger a particular enthusiasm for them. These tokens or coins are then bought in droves, precisely because everyone is talking about them. And when demand increases, prices also go up.

Because some cryptocurrencies, Bitcoin in particular, have made headlines several times in the past, a rise in their prices is often interpreted by speculators as a sign that further growth is to be expected. strongest in their courses thereafter. This is why the jump in the price of a cryptocurrency often causes, by itself, an even greater enthusiasm for it. Even larger purchases ensue and its price continues to rise.

However, there is always a risk that investors decide at some point to take their profits following the jump in price and then resell large quantities of the tokens or coins concerned. In this case, the price of these can then very quickly start to fall again. The enthusiasm around a title is therefore an important factor in the evolution of prices but it does not constitute a reliable signal indicating that the price of a currency will continue to increase.

Such hype can also occur when large investors – often referred to as “whales” – put a lot of money into a currency. When automaker Tesla announced in early 2023 that it had purchased Bitcoin worth $1.5 billion, the price of this cryptocurrency soon reached a new all-time high. Conversely, prices can also fall rapidly when the “whales” sell a large amount of tokens and withdraw from the game.

  • ­ Events at Cryptocurrency Service Providers

The “crypto” scene is dominated by many private service providers. As a result, events related to these companies can also massively influence the price of cryptocurrencies.

An example that occurred early in the cryptocurrency boom is the infamous hack of the Mt. Gox trading platform. In 2023 , this platform handled approximately 70% of all Bitcoin transactions. In the space of four years, hackers managed to steal over 800,000 Bitcoins from Mt. Gox and its users. When this theft was revealed in 2023 , not only did this exchange go bankrupt, but the price of bitcoin also lost almost a third of its value. Previously, rumors about Mt. Gox had already led to a drop in the price of this cryptocurrency.

Conversely, certain events occurring at service providers can also contribute to driving up prices: for example, when the stock exchange service provider CME announced in 2023 that it would be possible to carry out futures transactions based on the Bitcoin, the price of this cryptocurrency immediately reached a new all-time high. Similarly, the listing of the Coinbase trading platform also catapulted the price of Bitcoin to a new all-time high in 2023 .

  • Community

Short-term hype is usually not enough to sustain the value of a cryptocurrency for a long time. The evolution of the course also depends on the size of the community around this cryptocurrency and the commitment it shows. Many “meme coins”, in particular, manage to maintain their value, and even increase it, because they can rely on a large community of fans who maintain interest in the corresponding currency.

For cryptocurrencies that are more technical in nature, the developer community also plays an important role. When, for example, Mike Hearn, a well-known Bitcoin developer, suddenly announced in 2023 that he would no longer participate in this project in the future, this cryptocurrency lost about 10% of its value. Mike Hearn had then posted a comment on a blog in which he wrote that the “Bitcoin experiment” had failed.

  • Application possibilities

If a cryptocurrency is to be used to be more than just a speculative commodity, then the question is no longer just what can be done with it – it is the extent of a currency’s effective circulation that then also becomes a determining aspect. A cryptocurrency, such as Bitcoin for example, could theoretically be an alternative to fiat currencies or so-called fiat currencies (such as the Swiss franc or the US dollar). For this, however, it is necessary that it be accepted in stores, online shops and at other points of sale (POS) .

The more a currency enjoys a wide degree of acceptance, the greater the added value it can offer and the more likely it is to win. When a cryptocurrency can be used more widely, it increases the demand for that currency.

However, the challenge is not only, as with Bitcoin, the acceptance of a cryptocurrency as a means of payment on a daily basis. If, for example, a specific non-fungible token (NFT) managed to establish itself as a standard in digital art, one would also expect the value of the cryptocurrency associated with it to rise at its round.

  • Offer

As we know, the price of a good or service is determined by supply and demand. Depending on the cryptocurrency in question, the number of coins or tokens available as well as the way in which these are put into circulation are regulated differently. This is why the effects of supply on the course also vary from one currency to another.

When it comes to Bitcoin, for example, there is a concrete cap on the number of new tokens that can be mined (“Mining” activity in English). The amount of Bitcoins that “miners” can get for processing transactions is halved approximately every four years. This therefore reduces the number of new Bitcoins that are available. Therefore, this process, which is called “halving” (which means halving in English), can cause the price of cryptocurrency to rise. For other cryptocurrencies, the upper limit of the number of coins that can exist is sometimes much higher, or even no ceiling is provided.

Another aspect that has a considerable influence on the supply is the so-called token “burning” process: in this case, the owner of this cryptocurrency pays a certain amount of coins or tokens in a wallet that no one – not even the original owner – has access to. In this way, these tokens are effectively withdrawn from circulation, which reduces the supply of these by the corresponding amount. When a reputable person or company reports that they have destroyed coins of a given currency in this way, it can also drive up its price.

  • Technology

The technology of “block chains”, or “blockchain”, is still relatively young and it continues to evolve rapidly. Improvements in this technology may help cryptocurrencies become more widely accepted in the future, which could convince other investors to buy them.

However, technical developments and adaptations of certain cryptocurrencies can also be a source of uncertainty. Interventions called “forks” are an example of this. During such a “fork” (English word meaning branching), a cryptocurrency is split into two parts. This is often used to launch new blockchain-based technologies.

Such “forks” not only lead to great uncertainty and debate within the community. Some investors also try, using special tactics, to take advantage of the phases when such a split is made. This generally causes increased volatility around the time such trades are made.

  • Concurrence

Many cryptocurrencies are very similar in concept or seek to fill similar niches. They are therefore in competition with each other. They can, for example, also compete with fiat currencies.

Developments in competition have an impact on the price of a cryptocurrency. There is, for example, a chance that a new cryptocurrency, thanks to a given technical development, manages to avoid certain weaknesses of market leaders such as Bitcoin or Ethereum. If the result is that the new challenger is better able to fulfill the same functions as the established currencies, then it is likely that the popularity of Bitcoin or Ethereum will start to decline – and therefore also their price. In such a case, the price of such a new currency should simultaneously soar.

  • fiat currencies

The evolution of the prices of fiat currencies also plays a role in cryptocurrencies. This is particularly the case when a token or coin is to be used as a means of payment, their prices then react to inflation and deflation. Some investors view cryptocurrencies as an investment of value that can withstand inflation. Since decentralized currencies are not tied to an economy or central bank, they should be able to retain their real value, at least in theory, even during periods of high inflation and deflation.

Some investors even speculate that cryptocurrencies – Bitcoin in particular – will serve as inflation protection in the future, much like gold. The meteoric rise in the price of Bitcoin over the past few years has effectively more than compensated for inflation during the same period. However, the price of this cryptocurrency soared dramatically during this period for other reasons and it is not certain that Bitcoin can constitute a good protection against inflation in the long term.

  • Regulatory framework

Because they are relatively new investment instruments, cryptocurrencies are not yet as heavily regulated as other financial products. This means that speculation in these currencies is subject to fewer restrictions. This can increase their volatility. It can therefore be expected that increased regulation will help to make cryptocurrency prices less volatile in the future.

However, the implementation of legal restrictions to regulate cryptocurrencies could also lead to volatility in their prices. For example, when the Chinese central bank announced in 2023 that cryptocurrency transactions would be considered illegal, the price of Bitcoin then crashed by $2,000.

If, instead of banning cryptocurrencies, states only decide to regulate them more, this could also contribute to increasing the number of institutional products based on cryptocurrencies – for example, in the form of the issuance of new Exchange Traded Funds (ETF) . The demand for such products would then in turn influence the prices of these currencies.

  • Political and economic uncertainties

Whether it’s a presidential election in the United States, the evolution of a global pandemic or fear of civil war, political unrest or economic uncertainty can help fuel inflationary fears. In general, these aspects also influence the behavior of investors. People who view cryptocurrencies as a stable, inflation-resistant investment might then want to seek refuge in crypto-asset investments. This increased demand would then push their prices even higher.

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