There are over 4,000 cryptocurrencies today, and more are added daily. This number is more than the total number of government-issued (fiat) currencies in the world.
While some cryptocurrencies have real-life use cases or are backed by solid projects, a large chunk of the coins is only mere open-source computer programs. The ease of creating a cryptocurrency has also contributed to the ever-increasing number of coins in circulation.
Do you ever wonder what drives the prices of cryptocurrencies? The way a coin is developed and for what purpose has a significant impact on its value.
The government or any centralized body does not control cryptocurrencies. However, certain factors influence the upward and downward movement of the prices of cryptocurrencies.
Key drivers of crypto prices
Demand and supply
Like every other commodity, the prices of cryptocurrencies are driven by the theory of demand and supply. When the demand exceeds the supply, the price shoots up, and vice versa.
The total supply of a cryptocurrency is usually stated in the whitepaper. Bitcoin, for instance, has a fixed total supply. While some others, like ethereum have no cap on supply.
Some cryptocurrencies have mechanisms that regularly “burn” existing tokens to control the circulating supply. Token burn is when a certain amount of the token is sent to an unrecoverable address on the blockchain.
Major factors that affect the demand for a cryptocurrency is awareness or increase in utility. Increased adoption of a cryptocurrency as an investment asset also drives its demand up and effectively limits the circulating supply.
For instance, Bitcoin experienced a significant increase in price in early 2021 as institutions started buying and holding it, and the demand exceeded the supply.
Major cryptocurrencies like Bitcoin and Ethereum trade on multiple exchanges. Every cryptocurrency exchange will most definitely list the mainstream tokens.
A few new tokens may only be available on select exchanges, thus hindering access for some major investors.
Though some wallet providers aggregate quotes for swapping any pair of cryptocurrencies across several exchanges, but charge a fee for it, thereby increasing the cost of investing. This also discourages many investors from investing in them.
Competition between projects
There are numerous cryptocurrencies projects in existence and there are new additions daily. As more projects launch, the competition among tokens stiffens and only those that are about to stand out will have investors.
A new application on the blockchain can quickly build a strong network, particularly if it enhances upon the shortcomings of an existing one. If a new competitor gains momentum, it seizes significance from the existing competition, thus dumping them and increasing in value in the process.
Social media is a major tool that can make or mar cryptocurrencies. They drive moods and desire among the community. The way the media portrays a cryptocurrency project largely affects the adoption, hence the demand.
Good buzz can certainly increase the value, while negative news can cause panic and lead to investors selling off their holdings.
Cryptocurrencies prices obey the simple economics of demand and supply. But unlike a traditional fiat currency other factors equally influence the prices.