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Why Does the Value of Cryptocurrency Change?

As of writing this article, even with the steep downturn in the crypto market, Bitcoin stands as the largest cryptocurrency in the world. Since its development in 2009 by Satoshi Nakamoto, the cryptocurrency has seen tremendous growth. This growth has sparked a completely new industry.

What makes cryptocurrencies different from other traditional currencies is that there is no central organization controlling them. Therefore, central organizations do not have total control over the price. So you might ask, what does affect the price of a cryptocurrency?

There are actually a number of factors that influence the value of cryptocurrencies. They are:

  • Supply and demand
  • Production costs
  • Availability
  • Competition
  • Regulations
  • News

In this article we’ll take a deeper look into how each of these can positively or negatively affect the price of a crypto coin.

Supply and Demand

In economics, supply and demand is the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. In other words, let’s say you were playing GTA Chinatown — you buy an item in an area where there is so much, that the price is what anyone is willing to pay, then you go to an area where everyone wants it but there isn’t much to go around, so the price goes as high as anyone is able to pay.

This applies to crypto as well, except in most cases, we’ll substitute location with time.

The supply of a cryptocurrency is controlled by its minting and burning procedures. Bitcoin has a fixed maximum supply of 21 million, which is predicted to be reached by 2140. Ethereum has no cap. Other cryptocurrencies will burn existing tokens to prevent inflation.

Demand is increased as people are aware of the cryptocurrency, the utilities associated with them and when other investors decide they want in on the action.

With Ether, the more projects that are run on the Ethereum blockchain, the more demand for the ether token increases. If an investor posts on their twitter about how great a crypto is, do you know how many people are going to start to buy? More on that further down the line.

Production Cost

Cryptocurrencies like Bitcoin and Ether are created through mining. This is a process which involves intensive calculations and processing. In simple terms, all the computers need to do is guess a predetermined value before the other computers on the network.

To improve a system’s chances of finding the value first, miners invest a lot of money into equipment to build the best machines for the job. One piece of equipment can cost thousands!

Apart from the equipment, the system needs a power source. Researchers have found that the cumulative cost of power which contributes to mining is equivalent to that of a country like Switzerland. Bottom line is, mining takes up a lot of power.

As more competition gets on board with mining, more investments into the best performing machines are made, which is an increasing cost. If a miner is investing so much of their money into mining a digital currency, then there must be adequate compensation. Otherwise, why do it? Hence the production affects the price.

Availability

What’s the point in creating something to sell, if no one can buy it? On paper, it’s worth whatever you say it is but in reality, it goes back to the supply stage. Cryptocurrency exchanges address these issues by providing a platform where available cryptocurrencies can be exchanged.

The most popular cryptocurrencies such as bitcoin and ether are available on most crypto exchanges. Smaller cryptos aren’t as prevalent and thus not available to investors, hence their prices don’t see much action.

Competition

Creating a new cryptocurrency is relatively easy. You can copy the code or use a website. This gives investors many varieties to choose from. Some of the competition created also may build on existing currencies, which makes them better.

Take bitcoin for example, at one point it had over 80% of the crypto market but as more crypto currencies have emerged, its slice of the pie has become smaller and smaller. The pie is probably bigger than before, but you get my point.

Regulations

If you check the news, when a government says something about a cryptocurrency, we see something happens with the price. If the government’s view on cryptocurrency is positive, then that could give me more access, hence more players in the game.

In a negative light however, let’s look at when China did a crackdown on crypto mining in 2021. This dropped the price of bitcoin by more than $10,000. The price did recover because the miners relocated, but it just goes to show you how instant the effects can be.

News

Everyone gets their news from various sources. Social media, classic television news sites. The sensational effect of getting news on demand undoubtedly controls how people react. Bad news can be blown out of proportion, which could lead to panic selling. A celebrity investor may post a tweet which will get everyone interested in a new crypto, creating a price spike as buying quickly increases. The news is therefore a contributing factor to the volatility of a crypto currency.

To Wrap Up…

Note that none of this is financial advice. Any specific information about existing cryptocurrencies shared here may change. The crypto market is a volatile one and you are strongly encouraged to do your research and due diligence before buying, just like with any other investment portfolio. One thing is for certain however: at the end of the day, global supply and demand is the greatest contributor to the volatility of crypto.

Looking to get into the Blockchain space or to continue growing your DAO? Unpluggd Digital provides services in on-chain software development including dApp creation, protocol implementation and more.

Reach out to set up a chat so we can get to work on your next project.

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