Ever since the creation of bitcoin, it’s safe to say that its price has experienced its fair share of ups and downs. We don’t have to check our bitcoin wallet every day to know that. Now, there are literally thousands of different cryptocurrencies — all with their own specific price. They, too, have seen their fair share of price swings.
But what are the factors that cause these price fluctuations?
The lead suspects
There are lots of factors that contribute to the changes in the price of a cryptocurrency. Here we’ll discuss the main 5:
Supply and demand
Starting at the most basic level of economics, supply and demand play key roles in the price of a cryptocurrency. The price of a coin will be determined by its availability. The harder it is to obtain, the higher the price. Less demand and higher supply mean lower prices.
Take the contrast between bitcoin and Ripple as an example. Bitcoin has a cap of 21,000,000 coins with less than 4 million left to be mined. Because of that (and other factors), bitcoin has an extremely high price because the supply stays the same and the demand goes up. Ripple, on the other hand, has a cap of 100,000,000,000 (100 billion). At the time of writing, almost 43 billion are in circulation, leaving a lot of coins left. This is why XRP’s value hasn’t gone over $3.
A big factor that could also contribute to the price of a cryptocurrency is how hard it is to mine the coin. Mining is the process of validating transactions and adding them onto the blockchain. Take bitcoin’s mining process as an example. At this point in time, bitcoin is extremely difficult to mine — it also may not be as profitable as it used to be. This is because there are already several mining pools that are dedicated to mining the remaining bitcoin and the more miners there are, the more difficult it is to mine for yourself — resulting in a higher price for bitcoin.
Political and legal issues
Around the world, there are different takes on how cryptocurrency should be regulated. In some countries, cryptocurrency is accepted enough to be considered legal tender. In others, it is outright banned. This means that as countries figure out how to regulate cryptocurrencies, it could affect the number of transactions. If the government controls it too much via regulations, it could negatively affect the price of a coin. On the other hand, if countries regulate it better, it could encourage new users.
Every cryptocurrency has a use (at least the most popular ones do — for a reason). If a coin serves no purpose, it is more likely to have a lower price. Bitcoin’s purpose is to be a peer-to-peer cashless system that could utilize complete digital money. Ethereum allows people to create their own decentralized applications. If a cryptocurrency has no practical use, it will probably reflect on its price on the market.
News and media
Positive and negative news can heavily affect the price of a certain coin. For example, if the media starts reporting about a recent hack that occurred, it’s most likely going to drive prices down. On the other hand, covering the rising adoption of a coin can result in prices going up.
Volatility isn’t always a bad thing
Despite cryptocurrency price going up and down rapidly, you shouldn’t take it as a completely negative thing. Volatility allows people to experience a more significant return on their investments. Some may even argue that volatility is the thing that adds the thrill to cryptocurrency trading.
If you’re too scared to hold on to any cryptocurrency, there are peer-to-peer marketplaces that have tons of payment options that’ll help you retain the value of your coins. You can buy bitcoins with cash and if you’re too afraid to leave it as bitcoins, you can trade it for gift cards or any other payment option available.
When the price is fluctuating, just don’t panic and you should be good. Think about all the decisions you’re making and make sure it aligns with the investment plan you had from the beginning. Keep a clear head and try not to let your emotions get the best of you.