Cryptocurrency is one of the most dynamic markets today. The use of this digital currency continues to spread, from investing and making low-cost money transfers to buying Teslas. You can even use it as collateral on loans, but this is not something we recommend. If you use cryptocurrency as collateral for a loan, the lender may ask you to pledge more if prices go down.
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Now, let’s look at five of the key factors driving the value of cryptocurrencies in today’s market.
Supply and Demand
Just like any market, supply and demand impact the value of cryptocurrency. If there are more people who want to buy a cryptocurrency token than sell it, the price will go up. The opposite is also true. When supply is higher than demand, the price goes down.
The supply mechanism of a cryptocurrency is known to the public. There are details on how it plans to create and destroy its cryptocurrency tokens. Some limit the number of coins that will ever exist. For example, we know there will be just 21 million Bitcoins. Others do not impose any limits on supply. Some cryptocurrencies implement burning mechanisms to prevent the circulating amount from increasing too fast and slowing inflation.
On the other hand, demand can rise as a project becomes more well-known or when the utility of a cryptocurrency grows. The broader adoption of cryptocurrency as an investment supports its demand and restricts the circulating supply. When significant investors began purchasing and storing Bitcoin in early 2021, the price of Bitcoin rose dramatically due to increased demand, exceeding the rate at which new coins were generated. As a result, there was a significant reduction in the overall available supply of Bitcoin.
The cost to produce a cryptocurrency also affects its value. New cryptocurrency tokens are generated through mining, which is essentially the process of verifying the next block on the blockchain. Cryptocurrency mining requires using a computer to check the next block in the blockchain, resulting in a significant investment in hardware and power.
The value of a cryptocurrency rises as mining expenses rise. Miners will not mine if the coin they’re mining isn’t worth enough to cover their costs. As long as people want to use the blockchain, prices go up because they need miners for the chain to function.
The most straightforward approach to regulating cryptocurrencies is imposing a tax on any fiat money used to cash out coins. However, this tax would only be levied on specific tokens, so individuals can convert their profits using a different coin.
Some nations have decided that there is no better approach to managing the crypto market than banning them altogether. If a country with a large base of cryptocurrency users implements a ban, it will negatively impact the price.
For example, China has banned ICOs and shut down all cryptocurrency exchanges. This tremendously impacted the market, as China is home to many miners and investors. Similarly, South Korea has banned ICOs and anonymous trading. While this didn’t cause an impact as significant as China’s ban, it still caused the market to dip.
Cryptocurrencies compete with one another and with traditional investments like stocks, bonds, and real estate. So far, Bitcoin has been the clear leader, but that doesn’t mean this will always be the case.
Moreover, a practical application on the blockchain may rapidly establish a network, especially if it overcomes an existing competitor’s limitation. If a new coin gains momentum, it draws value from the current competition, causing a dip in its price as the new currency sees a price increase.
Investors are always looking for the best return on their investment, so investors will likely switch if another cryptocurrency offers a higher return.
Finally, cryptocurrency exchanges play an essential role in the market. These are the platforms where people buy and sell cryptocurrencies. Kraken, Coinbase, and Binance are among the most popular exchange platforms.
The value of a cryptocurrency is also affected by the fees charged by exchanges. For example, if Coinbase charges a higher cost for Bitcoin than Binance, people are more likely to buy Bitcoin on Binance because people want to get the best deal possible.
Additionally, if you need to make more than one transaction to exchange any cryptocurrency token, paying a fee for each swap raises the token’s investment cost.
These are just a few of the factors that affect the cryptocurrency market. The market is constantly changing, so it’s crucial to stay up-to-date on all the latest news. The bitprofit system can help you make a profit while providing opportunities for those who are less fortunate.
John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.