Ten Factors That Affect Cryptocurrency’s Price

Ten Factors That Affect Cryptocurrency’s Price

in Bitcoin, Cryptocurrency, Newbie
The price of Bitcoin has dropped to around A$9,000 in the last few days, after almost hitting A$20,000 in the past months. All of this shows how volatile the currency is, prompting the question, what leads to such huge movements? Cryptocurrency is a new revolutionary type of currency. Like any other currency or unit of account, they only have value because people think it has value. Some currencies are backed by gold or other precious metals; others are backed by nothing but hot air although have value because people think it has value and uses it as a unit of exchange. Cryptocurrencies were designed as a unit of exchange and as a place to store assets without relying on a central bank. This article will discuss what affects the price, it is not limited to Bitcoin but this will cover all cryptocurrency. The main factors that affect the cryptocurrency’s price are the following:  
  • Node Count


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Node count is a good indicator of the value of a cryptocurrency. Node count is a measurement of how many active wallets on the network exist which can be searched on the internet or the homepage of a currency. In order to analyze whether or not a currency has a fair price, one can search for the node count and the total market capitalization of the cryptocurrency then compare those two indicators with other cryptocurrencies. This is one way to find out if a coin is overbought. Node Count also shows how strong the community of a cryptocurrency is. The more nodes, the stronger the community. This is important to know in order to calculate the chances for the Currency to overcome crises.  
  • Supply/Demand


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Precious metals gain their value/perceived value due to their utility and limited supply, and the price is often tied to supply/demand. Supply/Demand is a simple economic factor that affects the price of many things. In some countries, Bitcoin and other cryptocurrencies are classed as an asset, in others as a currency. Bitcoin, for example, has a maximum of 21 million whole units, divisible 100 million times. With over 7 billion people on the planet, if even 1 billion were to adopt Bitcoin, 21 million whole units would not spread very far without a significant price tag. The supply is also bought in at a constant rate and is unchangeable due to the conscious rules. This creates a supply that is limited, and thus people will pay more to get the coins they think have value. Block reward halving’s, like the Bitcoin halving of 2016 caused the price to slowly increase as the halving approached, due to the reduced supply of new incoming coins imminent. This can affect the price of many cryptocurrencies, but in the case of Litecoin, did not even make a major dent in the price.  
  • Animal spirits


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Economists have long had a notion that psychological factors affect investor decisions. This is called “animal spirits” and refers to investors making decisions based on the behavior of other market participants and their own intuitions, rather than hard analysis. Analysis of the price of Bitcoin shows that positive media coverage is one of the main factors driving the price. Positive media coverage of new technologies causes a well-known hype-cycle – a peak of hype is followed by a “trough of disillusionment”. This was most apparent in the early days of Bitcoin when the mainstream press started to report on the new currency and caused a number of short price spikes and collapses. As media coverage increases and other factors are brought in, it is harder to distill the effect of the media alone. Something similar happens when high-profile companies go public, as investors “pile in” and the value rapidly increases from a low base. Think of a company like Twitter, which saw a huge sharemarket “pop” when it went public.  
  • Government Regulation


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Each time a government releases official statements about the regulation of digital currencies, the price of bitcoin is normally affected. Even if the actions of that government are not related to the virtual currencies directly, the impact will still be felt. A good example of this can be derived from the Cyprus banking crisis, where the government seized funds. This prompted discussions on whether Cyprus should adopt Bitcoins as their new currency. Anytime there are restrictions on the use of bitcoins, their price changes drastically. However, because of the anonymous nature of the bitcoin transactions, most governments are proposing certain rules to eliminate this anonymity. For instance, there have been proposals to create a third party supervision mechanism for bitcoin exchanges. This is bound to significantly affect the bitcoin price.  
  • 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. Given that bitcoins are not widely accepted as a means of transactions or payment, not many people and institutions can accept them. Because most things still have to be paid for in fiat currencies, many businesses often sell large portions of bitcoins so as to pay for their business expenses. This is normally referred to as “dumping” and it can keep the value and price of bitcoins in a depressed state. Based on the bitcoins number and the number of companies selling them at any given time, this can cause a “panic sell,” which may send the bitcoin price crashing.  
  • Production Cost


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The direct costs and opportunity costs of producing a coin are also factors which determine the value of a cryptocurrency. Bitcoin, for example, has a high cost of production. The resources and energy that have been put into the mining of bitcoin can be seen as a reason why the bitcoin has value. This includes the cost of manufacturing specialized hardware like CPU's/GPU's or servers as well as the cooling systems for such hardware. In addition to this, there are also significant energy costs that are necessary for these systems to operate. Research has shown that the electricity costs of Bitcoin mining range between $400 million and $6.2 billion per year.   Even though it may seem that the energy used for the creation of new Bitcoins is wasteful, it is still the only way to provide safety for the users - as mining is the reason why governments can't shut down the Bitcoin blockchain easily. But there are discussions among programmers on how to make the process more efficient.  
  • Technological Changes and Innovations


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Technological advancement and innovations also have the ability to influence the bitcoin price. For instance, the integration of bitcoins in PayPal’s payment system has raised awareness and stimulated a lot of interest in digital currencies among most people. Moreover, many startups have also started utilizing crowdfunding platforms which accept crypto-currencies, with Ethereum being the best example. Blockstream is another innovation that could provide added functionalities to bitcoins, which will, in turn, boost their overall value and price. The platform was started so as to develop new ways of accelerating innovations in these types of currencies and smart contracts.  
  • Political risk


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Political risk around national currencies can also affect the price of Bitcoin as people use it to hedge against price movements in a particular currency, or they need to quickly move large amounts of value out a country or currency. The economic crisis in Greece in 2015 was followed by reports of increased buying of Bitcoin by Greek citizens wishing to protect their wealth. This did not seem to affect the price of Bitcoin on global markets, however, which remained steady between A$300 and $400 for most of that year. But nervousness about the national referendum for Britain to leave the European Union (Brexit) on June 23, 2016, did lead to an increase in the price of Bitcoin alongside a decrease in the value of the British pound. The pound started plummeting around May 20, 2016. By July 25 it was more than 10% below its pre-Brexit value. For the same period, the price of Bitcoin increased by over 65% (from £302 to £502). The election of Donald Trump as US president was also followed by two months of steep rises in the price of Bitcoin. Many attributed this to uncertainty in the US economy.  
  • Interest From Institutional Investors


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As financial services companies begin offering cryptocurrencies in custom products, Bank of America predicts that it could affect the “liquidity and market capitalization for such currencies.” European institutions have taken the lead in designing new products using cryptocurrencies. For example, investors can track ethereum’s price using exchange-traded notes in Nasdaq’s Sweden exchange. Switzerland’s financial regulatory authority has approved a product from Falcon Bank that enables its clients to trade in bitcoin. U.S. banks are following suit. Goldman Sachs is said to be considering bitcoin trading while JP Morgan launched a payment network based on ethereum’s blockchain yesterday. These moves could translate into another price increase across the board. With all cryptocurrencies, especially smaller less known ones, investors can manipulate / inadvertently affect price in the following ways:
  • With a large amount of capital at their disposal, can buy a large percentage of the coin supply, then attempt to promote good stuff about the coin to ‘pump’ the price.
  • An investor making a large investment in a small coin can cause inadvertent price increases and falls.
  • People seeing investors have confidence in a cryptocurrency can encourage them to invest, and the more investors and the more demand for a currency, the higher the price.
 
  • Scams


 bitcoin bubble
Cryptocurrencies can sometimes be developed as a scam. This can often be associated with a coin that promises the latest and greatest technology but is also ‘premined’ by the developers before release. This ensures they hold a good chunk of coin supply before coin release so when it is given value they dump their holdings, which crashes the value for other investors but can potentially earn the scammers a large sum of money and it is often difficult to prosecute such scams and in many jurisdictions impossible at present. Instamining is a variant where the ability of coins to be mined is higher at the beginning after release to achieve the same goal. Investment scams often cause people to invest in a cryptocurrency or even pay money towards the developers to develop the currency, where the only intention is to run off with the money of investors. Due to the public nature of a blockchain, premines and instamines can easily be spotted, and when discovered often cause the value of the coin to plummet, this can happen before or after the developers did their dump of coins.  

Conclusion

This article has discussed what affects the value of cryptocurrency and what can give it value. It boils down to the perception of a majority, anything has value to someone because they believe it has value, for whatever reason they may have. The main factors affecting the value of cryptocurrency have been discussed and perception of value is what ultimately gives it value, what people are willing to put in to get a unit of cryptocurrency, be it time, fait money or labor. The same applies to any commodity such as food, water, shelter, technology or any other commodity. The effort put into creating/obtaining it and demand. So keeping cryptocurrency positive in the perceptions of people is key to maintaining value in any cryptocurrency or commodity.  

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