Monday, August 15, 2022

What Drives The Price Of Cryptocurrencies

Regulations And Legal Requirements

Crypto: 3 things driving the pullback in bitcoin and ethereum

There’s some confusion about who should regulate the exchange of cryptocurrencies. The Securities and Exchange Commission says cryptocurrencies are securities like stocks and bonds, while the Commodity Futures Trading Commission says they’re commodities like coffee or gold.

Both can’t claim regulatory authority over cryptocurrency exchanges. A determining ruling could provide greater clarity and improve cryptocurrency values while opening the door for more widely traded crypto-related financial products.

Regulation is required to allow for easier ways to trade cryptocurrency. Products such as ETFs or futures contracts provide more access to cryptocurrency for investors, increasing its value. Additionally, regulation could enable investors to take short positions or bet against the price of cryptocurrencies with futures contracts or options. That should produce better price discovery and reduce the volatility of cryptocurrency pricing.

Regulations could also negatively impact demand for cryptocurrency. If a governing body changes the rules to disfavor cryptocurrency investment or use, it could send the price of cryptocurrencies lower.

The Second Buyer Increases The Value

Lets say you and Pam have waited long enough and Jim came along. He thinks the project is actually worth investing and the intrinsic value of a KryptoCoin should be $50. At this point, he wants to buy 60 kryptocoins for $15 each. Lets say you sell all of your coins to Jim and Pam sells 10 of hers. He gives you $750 and gives Pam $150. In the meantime, he increases the overall market cap of KryptoCoin to $1,500.

Now, you dont hold any kryptocoins but you have generated $1,250 from selling your coins. Pam holds 40 of them that are worth $600 and has generated $150 from her transaction with Jim. Lastly, Jim holds 60 kryptocoins that are worth $900. Moreover, if his prediction is correct, the price of KryptoCoin will increase over time and he will be holding 60 kryptocoins worth a lot more than his initial investment.

This is a very rough description of supply and demand dynamics in the cryptocurrency ecosystem. In real life, we have coins that are not pre-mined. Bitcoin is capped at 21 million BTC, and we still have around 2 million bitcoins left to be mined. Moreover, there is the cost of production, the coin availability on exchanges, political and legislative regulations, and speculations around the coins. So the dynamics are a bit more complicated than our story.

The Perspective Of The Investor

Cryptocurrencies will always be driven by demand-side factors. So many economists and investors think cryptocurrencies are in a bubble. ICOs attract much capital. This is similar to the past dotcom boom. People brag about the fact that it is really easy to make money with crypto. However, there are also others that think this is just the start of the moves leading to huge crypto value increases.

Opinions are definitely different and investors think differently but the highest possibility is that some of the cryptocurrencies will stand out and will survive, no matter what. However, most can actually disappear as they become useless and investors lose interest.

Further Reading:How to become a successful cryptocurrency investor

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Do Cryptocurrencies Have Intrinsic Value

All cryptocurrencies have intrinsic value in different forms. Bitcoin and its forks and other cryptocurrencies that are mostly used as a medium of exchange have an intrinsic value deriving from their ability to be censorship-resistant.

Ethereum, Cardano and Polkadot have these intrinsic value and more. On all of these blockchains, many DeFi services can be implemented, such as loans, trading, private banking, and even gaming.

Fiat currencies, such as the US dollar has also has intrinsic value, although uncomparable to cryptocurrencies. Fiat currencies are valuable simply because governments says that it is legal tender. Beyond its use as medium of exchange, fiat currencies dont really have any other function.

Cryptocurrency Vs Fiat Currency: How The Two Compare Against Each Other

Why Cryptocurrencies Shouldn

The biggest comparative factor that stands between the cryptocurrency vs fiat currency debate is their backing. The fiat currencies are backed by the central governments and its value is derived from the fact that the central government states it has value and then the parties transacting in the value are putting their trust in them. In the case of fiat currency, central banks control the entire supply of money and thus inflation.

Cryptocurrencies, on the other side, were brought into existence to not let the central government have the autonomy to regulate the funds of an individual. And because they have a fixed supply, the devaluation through inflation is next to non-existent. Supply and demand is the most important determinant for crypto market prices.

Apart from this, both cryptocurrency and fiat currency come with similar characteristics: they both can be used as the medium to exchange services and products and they can store value.

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Why Cryptocurrency Prices Fluctuate So Much

A single statement answer to the question of what drives the price of cryptocurrencies would be because it is still at a nascent stage.

Being a market that is yet to find its set of logical use cases, cryptocurrencies are still at a very nascent stage. And the result of this newness is the high volatility in the industry, which is majorly driven by the heightened experiments that investors make to get a sense of how the cryptocurrency prices fluctuate or why does bitcoin fluctuate so much?

An example of this can be seen in the fluctuating Bitcoin value cryptocurrency market price that the famous coin has shown this year

Besides this nascency, there are several other factors that affect the frequently changing cryptocurrency value in the market.

Whats Behind The Latest Bitcoin Drop

Many investors see Bitcoins price swings as part of the game, but volatility is tough for individual investors to deal with, Noble says. Like Yang, he warns against selling too fast.

Recent price fluctuation has followed new uncertainty over the countrys lingering fight with COVID-19, new regulatory actions by the U.S. government, as well as the new legislation pertaining to crypto in the infrastructure bill. In an industry as new and unproven as cryptocurrency, it doesnt take much to drive big swings in price. More generally, new short-term investors who are selling their holdings in reaction to the latest drop may be contributing to the drop in Bitcoins value, according to a report from Glassnode Insights, a blockchain analysis firm.

While fluctuations are expected, Noble says hes been surprised by drops earlier this year. I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong, he says.

Some of this years drops have been caused by a combination of factors, Noble theorizes, from excitement about low-quality coins, to negative remarks from Elon Musk, to Chinas recent crackdown on crypto services. This mix of factors has potential to make sell-offs all the more violent, says Noble.

He likens the drop to the stock market crash of 1987, from which the markets took months to recover. But because crypto moves a lot faster today than equities did in the 1980s, Noble says we may see a quicker recovery.

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Easy Public Access To Cryptos

Cryptocurrencies are easily accessible to the public all over the world. All you have to do is open a crypto wallet, an exchange platform account, load it with cash, and start buying cryptos. Digital currencies are well established nowadays as a new form of financial assets that can be used far more efficiently than traditional fiat money. For this reason, the market cap of popular cryptos is steadily increasing, along with their price. Many people also trust cryptos more than fiat currencies because of the deflationary nature of these assets which makes them a good method for storing funds safely, unlike fiat money which is subject to possible inflations.

How Does Bitcoin Supply Affect Its Price

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Since Bitcoins introduction in 2009, its bitcoin supply has been diminishing. Every four years, the cryptocurrency undergoes a halving event during which miner rewards are reduced by half on average. The decline in supply corresponds to increasing demand due to news media coverage and its price volatility. A combination of shrinking supply with a boost in demand has resulted in surging bitcoin prices.

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What Drives The Value Of Cryptocurrencies

There are innumerable cryptocurrencies in the crypto market right now. An increasing number of investors and even ordinary people too are investing in cryptocurrencies. Have you ever wondered about the increasing demand for cryptocurrencies? Since the regular currency you use or that is in wide circulation is generally recognized as legal tender, the demand, usage, and purchasing power determine the value of these regular currencies. But cryptocurrencies are not like that. Only a few nations have acknowledged them. They cannot be as widely used to purchase commodities. Then what are the factors that determine the price? Why is cryptocurrency still so famous despite lacking all the qualities a normal currency possesses?

This article clears all of these doubts and more regarding the same. You must have wondered about the same questions at least once. Scroll through the article to clear them all today. Some people argue that these are all unnecessary discussions. But everything is important, and this too equips you with strong knowledge and awareness to deal with the real-time price challenges of the cryptocurrency.

The Rules The Bitcoin Network Follows

Transactions added to the Bitcoin blockchain are coded and set in stone forever. Miners in the Bitcoin network compete to be the first node to solve a complex cryptographic puzzle. The winner is declared to be the first node to mine a valid block and receives the associated block reward.

A new block is added to Bitcoinâs blockchain every 10 minutes after consensus in the network has been reached by all network participants on the validity of a block.

A new block is added to Bitcoinâs blockchain every 10 minutes after consensus in the network on the validity of a block has been reached by all network participants.

All transactions in the Bitcoin network have been following a precise and inalterable process since Satoshi Nakamoto created the first block called the âGenesis Blockâ. The only provision in the Bitcoin protocol that entails a change from time to time is the block reward amount that miners get, in a process called âBlock Reward Halvingâ.

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Determining Price Of Cryptocurrency

The most effective way the price of a cryptocurrency coin is determined is by its demand. Heavy demand from buyers will push the value of a digital coin upwards. Conversely, if a coin has a high token supply with little demand, then its value will drop. Other factors that influence the price of a crypto coin include the level of token utility i.e., how useful the token is. A difficult mining process would mean it is more difficult to increase the supply of the coin and cause upward pressure on the price when demand is high.

Inflation Of Fiat Currencies

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If the price of a fiat currency falls, then the price of Bitcoin would go up with respect to that currency. This is because you will be able to get more of that currency with your Bitcoins. This phenomenon can be seen today, since the FED, the ECB and other central banks have been printing more and more money and keeping interest rates artificially low.

Figure 1: Sketch of the differences in the price development of a cryptocurrency and the US Dollar

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What Is The Price Of One Bitcoin

The price of a single bitcoin is determined by several factors, including supply and demand, competition, and its regulation. News developments also influence investor perception about cryptocurrency.

The intrinsic value of one bitcoin can be estimated by computing the average marginal cost of production of a bitcoin at any given point in time, based on the block reward, price of electricity, energy efficiency of mining hardware, and mining difficulty.

On Nov. 10, 2021, bitcoin reached an all-time high of $68,790.

How Users Increase Crypto Value

There are also a few methods how users increase cryptocurrency value

  • Buy low, sell high using the classic investment strategy, users can increase the value of crypto by buying and holding coins. The buying increases demand and hence crypto value increases.
  • Mining the act of mining Bitcoins or altcoins can be profitable. It also impacts the supply of cryptocurrencies.
  • Increasing utility as more institutions invest in crypto and accept it as a form of payment, its utility increases. As a user, you can contribute to this process. This will increase the value of cryptocurrencies over the long term.
  • Media coverage crypto prices fluctuate according to media coverage. Users can impact this through their social media accounts.

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How Have Cryptocurrency Prices Changed Over The Past 18 Months

Tracking the price of Bitcoin gives us a good indication of the overall cryptocurrency market in the past 18 months.

Bitcoin started 2017 at under $1,000 and took a dip when China announced investigations into cryptocurrency exchanges in the country. At that point, the majority of Bitcoin trading took place in China, and the price of Bitcoin dropped to lows of around $775, while the overall cryptocurrency market cap stood at close to $15 billion.

Bitcoin made a slight recovery to well over $1,000 but by March 2017, dropped back down to below $1,000 when the SEC denied the go-ahead for a Bitcoin ETF. The overall market cap dropped $5 billion in two days.

In April 2017, Japan declared Bitcoin legal currency, which saw the price jump back up over $1,000. The total cryptocurrency market cap stood at around $26 billion at that stage.

From April 2017 to July 2017, Bitcoin steadily climbed close to $3,000 while the overall market cap went past $100 billion. However, by mid-July 2017, the price came crashing down to below $2,000 in a few short days when the Bitcoin/Bitcoin Cash split took place.

The effects were short-lived and, by the end of August 2017, Bitcoin recovered to almost $5,000 and the overall cryptocurrency market cap came close to $170 billion.

From here, the Bitcoin price really picked up momentum. By the end of October 2017, it had gone past the $6,000 mark and finished November 2017 at just under $10,000 per BTC.

What Are The Biggest Determinants Of Cryptocurrency Prices

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Supply and demand is the most important determinant of cryptocurrency prices.

This is a basic economic principle. If a cryptocurrency has a high token supply with little demand from traders and users, then the cryptocurrency& rsquo s value will drop. Conversely, if the supply of a particular cryptocurrency is limited and the demand is high, then the value of the coin will increase.

This is linked to the scarcity element that drives up prices and is one of the factors that saw the price of Bitcoin climb to its highest levels. The supply of Bitcoin is capped at 21 million BTC & mdash which is relatively low compared to other tokens & mdash while the demand has soared in recent years.

The media or public sentiment also has a big influence over the price of cryptocurrencies. If a token or platform gets some negative publicity, you would generally see the price of that coin take a dip. While, if the same coin were to get high profile support and good media coverage, the price would almost certainly increase. This means prices are heavily influenced by human emotion and hype.

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Finding Value In Cryptocurrency

If you understand the core principle of supply and demand behind what gives cryptocurrency value and the factors influencing them, you can make better cryptocurrency investment decisions. If you believe demand is going to increase for reasons X, Y, and Z and don’t think supply will keep up, that cryptocurrency could be a good investment. But be aware that governments still don’t have best practices for regulating cryptocurrency, which makes it a particularly risky and volatile investment no matter what.

Why Does Bitcoin Value Fluctuate

One reason what makes bitcoin price go up against fiat currencies is the perceived store of value versus the fiat currency. It means that it has to do with the uncertainty of bitcoin as a viable form of currency or store of value. Another reason for price fluctuation includes reasons such as media coverage, speculation, and availability.

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How Does Cryptocurrency Work And How Is Its Value Determined

To understand that, we need to first know how a cryptocurrency is different from a fiat currency . The biggest difference is that a fiat currency is backed by governments and declared as legal tender. It derives its value from the fact that two parties in a transaction put their trust in that value. Most countries operate in a fiat currency system, where central banks and monetary reserves control the supply of money, and, as such, indirectly control inflation.

Cryptocurrencies are not regulated by governments they are decentralised. Most countries are yet to accept them as legal tender. Cryptocurrencies will also generally have a fixed supply, therefore their devaluation through inflation is unlikely.

Other than that, both have similar characteristics. Both can be a medium of exchange to buy products and services and both have a relative store of value.

Factors That Affect Cryptocurrency Price Movement In Market

Bitcoin Cost

The factors affecting price of cryptocurrency could range from the scope of cryptocurrency application in the present day to the future uses of cryptocurrency coin and a series of other linked elements falling in the development of the cryptocurrency space. Here are some of those reasons that bring about a crypto market prices movement.

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