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What Causes Cryptocurrency Price Fluctuations? (Explained)

What Causes Cryptocurrency Price Fluctuations? (Explained)

Whether you're new to cryptocurrencies or into it for a while already, you may have wondered about fluctuations. Since Cryptocurrencies such as Bitcoin experiences extreme changes now and then, you probably ask yourself the question:

What causes cryptocurrency price fluctuations? Cryptocurrency price depends on many factors. However, it's summable into two, namely, supply and demand. For instance, a particular cryptocurrency has a cap. Once it gets reached, it will no longer create anymore. In general, the price goes up when the demand cannot keep up with the supply.

Of course, there's more to it than just a simple supply and demand explanation.

In this article, I did thorough research to answer the questions that may have bothered you as a newbie or experienced investor.

Without further ado, let's get into it more!

Why do cryptocurrency prices fluctuate?

As I said, cryptocurrency prices fluctuate due to the constant supply and demand. Moreover, it also fluctuates due to the number of competition and the exchanges it trades on for every moment.

In general, we can sum up the factors through which the prices depend. These are the following:

The supply of cryptocurrency and market demand for it

The principle of supply and demand is quite simple. If there are limited supply and high demand, the price will go up.

On the other hand, once the demand goes down and the supply goes high, the prices would go down.

For instance, the price of cryptocurrencies would fluctuate depending on supply and demand in the market.

Thus, you can expect the price to go up once the supply becomes limited and the demand starts to rise.

The cost of producing a cryptocurrency through the mining process

Although cryptocurrencies are virtual, they remain as products with a real production cost. Among the expenses are electricity, as well as the rewards to miners.

The rewards to miners for verifying blockchain transactions

Miners get rewarded for every transaction they successfully verified in the blockchain. Thus, more miners joining the competitions makes the problem much more difficult. The more difficult it is, the more expensive it becomes.

The number of competing cryptocurrencies

Cryptocurrencies come in many other tokens. Although Bitcoin is the most prominent, hundreds of tickets also exist for users.

The exchanges it trades on

Of course, just like equity investors trade stocks over indexes. On the other hand, cryptocurrency investors trade cryptocurrencies over platforms. Thus, the exchange value also becomes a factor for the price to fluctuate.

Regulations governing its sale

The classification of cryptocurrencies as digital assets also becomes a factor in the price. The Securities and Exchange Commission sees it as securities. On the other hand, the Commodity Futures Trading Commission sees it as a commodity.

It can impact prices in two ways. First, it gives access to investors who cannot afford to purchase an actual cryptocurrency, which leads to an increase in demand.

It can also reduce price volatility by allowing institutional investors to use their substantial resources.

Why does Bitcoin fluctuate so much?

Bitcoin fluctuates so much since the factors through which it depends are also changing so much now and then.

For instance, when too many people start buying Bitcoins, the demand increases. However, as the order reaches a certain saturation point, the price would fall.

Of course, it would happen due to the ban in some countries. It can also happen that people would lack the willingness to pay the price.

How does cryptocurrency value increase?

Since the price of cryptocurrency depends on certain factors, its value depends on it.

There should be a limited supply with high demand for the value to increase. If many people started buying cryptocurrencies, the demand would get high.

If the supply can't accommodate the demand, that's when the value of cryptocurrency will start increasing.

Other factors would be the increase of miners competing for rewards. The more miners try to verify transactions, the more their value would increase.

How does cryptocurrency value decrease?

On the other hand, the value of cryptocurrency would decrease once the supply becomes plenty, and the demand goes down.

If many people opt out of cryptocurrencies, the more it will be available. Further, since people wouldn't buy it, the value would also decrease.

Another way would be the decrease of miners in the field. Since fewer persons would verify transactions, the rewards would also decrease.

How volatile are cryptocurrencies relative to gold and other currencies?

If you compare cryptocurrencies to gold and other currencies, you may find huge differences.

For instance, cryptocurrencies' volatility is three times higher than most country currencies. However, digital cash is about six times more volatile.

As investors, we can all agree that cryptocurrencies such as Bitcoin are a better investment for potential short-term gain. However, it also has the potential to lose a lot of money.

On the other hand, gold offers a stable investment that guarantees a great return in the long term.

Summary

Cryptocurrency price fluctuates wildly, and it's primarily due to the principle of supply and demand. Once the demand is great and the supply becomes limited, the price tends to go up.

On the other hand, the value would go down once the demand comes down and the supply becomes more available.

As an investor, you should keep in mind that cryptocurrencies have many risks but are an excellent option for short term gains. It also has significant differences to both gold and other currencies.

As always, it would depend on your preference when it comes to considering cryptocurrencies over other forms of investment.


Published: 02/04/2021
What Causes Cryptocurrency Price Fluctuations? (Explained)
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