The cryptocurrency market is highly volatile, with price fluctuations that represent real opportunities for traders and holders of these currencies. To better speculate on cryptocurrencies, however, it is important to understand how they work and to master the factors that explain their volatility. This is the key to everything trader in search of performance and profitability. Through this article, we take stock of the various factors that influence the value of these digital currencies. Let's discover them together.
The main factors influencing the price of cryptocurrencies
Analysts agree that the main elements influencing the Bitcoin price in dollars, or various other cryptocurrencies, it is the law of supply and demand and the play of competition. We explain why.
Supply and demand
Indeed, as they are adopted and increasingly used as payment methods or stores of value, cryptocurrencies gain value. Thus, the higher the demand for a particular cryptocurrency, the more valuable it will be in the blockchain and in the financial system. But with low demand, it should not be surprising to see a drop in its value on the market.
The game of competition
Just as basic economics principles explain, some cryptocurrencies can increase in value due to the competition they face from other cryptoassets. This is the case, for example, with Bitcoin. Since its launch and growth, hundreds, if not thousands, of other cryptoassets have been put on the market. The blockchain. Among the best known, we find in particular dogecoin, ethereum or solana. In addition, there are also certain crypto assets that have been specially created to limit bitcoin or other currencies in their rise.
Therefore, as in any competitive market where there are different companies and different products, the good performance of some can affect the performance of others, and vice versa. Cryptocurrencies are therefore not only in opposition to traditional money. They are also the subject of a “war” between them, which explains their constant volatility.
So, when a token loses interest in the eyes of the public, it is sometimes because other tokens have developed new features and found favor in the eyes of a large number of people. This will contribute to the loss of value of one token, and the gain in value of another, and therefore to fluctuations in the prices of the various cryptocurrencies.
Other elements that can influence the value of cryptocurrencies
Other, more background issues also influence the price of cryptocurrencies. These include trading volume, the cap on the number of cryptocurrencies in circulation on the market, and the complexity of the “mining” process to create new ones. We tell you more about this below.
Compared to other global financial markets, the cryptocurrency market remains relatively “young” and underdeveloped. This results in a low overall trading volume, and this makes the market more vulnerable to fluctuations. Indeed, the less money invested in a market, the more unstable it is.
The limited number of cryptocurrencies in circulation contributes to this phenomenon. Since the amount of cryptocurrencies available is capped, the market remains small, which reinforces the fluctuations.
That said, it must be emphasized that the production of each cryptocurrency is a complex process, and it has a cost. Indeed, each crypto asset is created by a process called “mining”. Just like mining, these are expensive machines that consume a lot of electricity that are used in the creation process. And that's without counting the engineers, the energy, the mining and all the labor of the crypto-sphere (the miners). Furthermore, to mine certain crypto-assets, engineers must solve a host of complex cryptographic equations. This results in a limited creation of cryptocurrencies, which also contributes to keeping the market more restricted, and the fluctuations more significant.
In short, cryptocurrencies are not ordinary electronic creations. Their cost and price vary according to these many factors. There is also the news of each currency that can influence its love or dislike by the public, and therefore generate fluctuations.