Mention cryptocurrency and most know what crypto is but have no idea of how the coins works. This new currency works in a completely unfamiliar way to other assets. Knowing how cryptocurrency prices are determined will help with understanding the new digital money.
Cryptocurrencies are encrypted decentralized assets, which means there is no single point of trading. Governments or central authorities do not control Cyrptocurrencencies. The asset is so new; it is having a hard time being accepted by governments as legal tender.
Flat currencies are considered legal tender backed by hard assets. Hard assets support the money we use every day. Governments and central banks control the hard assets and supply.
Supply And Demand:
This core fundamental of economic principle helps to determine the value of cryptocurrencies. If there is little demand from traders the price drops, conversely, strong demand sends the asset up.
Another factor to consider if you are thinking of investing in the assets is capped supply. Some cryptos have no cap to their supply, so prices can fluctuate wildly. Other coins, like Bitcoin, have a finite supply. This supply cap helps to stabilize prices. Make sure you are familiar with the terms circulating, total and maximum supply.
Public sentiment contributes to the value of cryptos. If there is negative press coverage on individual coins, the price generally falls. On the other hand, if coverage is positive for a high profile coin, expect the price to rise.
Other factors have a bearing on the value such as token utility, proof of work and higher mining difficulty.
If you mention Bitcoin to someone, the first statement is usually the wild fluctuations in daily price. The market is still very new; this inherently makes the asset volatile. Liquidity has a significant influence on where people invest their money. Cryptocurrencies have extreme liquidity issues when compared to more established markets. There is a myriad of factors which all point to a very thin market.
The cryptocurrency market is seeing tens of thousands of new investors each day. These new investors have a major impact on prices going up or down. All of this adds to an extremely disruptive market.
Price manipulation is always rampant with new markets and cryptocurrencies are no different. The incentive to grow revenue from newly formed crypto companies creates a considerable amount of pressure. Manipulating the price is an easy way out, especially with all of the new participants.
Predicting The Price:
Cottage industries around Wall Street guarantee their system can predict prices accurately. Forecasting the future always border on the extremes. Wealthy investors are betting big bucks that Bitcoin will pass the one million mark.
On the other side of the equation, some predict a complete collapse of cryptocurrencies.
Coin predictions should be looked at with a very critical eye. There are so many factors influencing the value of these assets; no one seems to know where the prices will land. Add to the fact there is no significant history of cryptocurrencies to rely on.
The only advice is, “Buyer Beware.”
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