Why does the cryptocurrency value change so often?

February 1, 2021

Reading Time: 4 minutes

Since the introduction of cryptocurrencies in 2009, The digital asset has found itself hailed as one of the world’s most volatile elements. No one knows when, why, and how but they do know how to capitalize on it. Cryptocurrency is undoubtedly one of the most fluctuating and volatile assets globally, currently at the forefront of modern trader portfolios. Everyone wants in on the opportunities that the market possesses. The Cryptocurrency market is like most financial markets; it has liquidity and volume, it responds to speculation and reputation, and it adheres to all the traditional market principles.

So, what is behind the code of volatile success? Who determines the prices, what shifts them? There’s a lot of questions to be answered, and If you’re interested in knowing why Cryptocurrencies are the way they are, we’ve got answers.

Cryptocurrency prices vs Fiat Currencies

The most crucial factor between fiat currencies and cryptocurrencies is the platform that backs them. Fiat currencies, in their origin, are supported by central governments and financial institutions. Its value is established by a governing body that has been determined by different parties and ‘trust.’

Countries worldwide operate in a fiat currency system that is governed by central banks and monetary reserves who generally control the supply of money and subsequently control inflation.

Cryptocurrencies, on the other hand, are decentralized, meaning a governing body doesn’t control them. The decentralized nature of cryptocurrencies doesn’t qualify the asset as legal tender. Unlike Fiat currencies, Cryptocurrencies essentially have a finite supply; hence the devaluation of assets through inflation is nonexistent.

While these assets may have different natures, they are supported by similar properties. You can buy commodities and services with both Cryptocurrencies and Fiat Currencies. Both assets adhere to the same laws of the market, and both assets have a relative store of monetary value.

Cryptocurrencies prices vs Fluctuation

The cryptocurrency market is in its nascent stages. It is considered very new in contrast to traditional markets that have been here for centuries. New markets adhere to many properties that make them primarily volatile such as:

Liquidity

Limited Liquidity can be easily found in markets compared with more mature and traditional economies, such as the foreign exchange market. Simply put, the total value of money is well over $90 trillion; however, the Cryptocurrency market is around $700 Billion, a 12800% difference.  This difference is also evident in trading volumes. Daily cryptocurrency trading volumes are about $200 billion compared to daily forex traders that cap at $5 trillion.

Buying and Selling Prices

Moreover, the difference in assets can be found in the spread of Buying and Selling prices. While foreign currencies may be spread out on a minuscule scale, probably in the one-hundredths of a dollar, cryptocurrencies spread in buying and selling prices can be as high as a few dollars.

Adopters

The market is gaining prominence as the year goes by. With more investors wanting in on the opportunity the market possesses, the crypto market is growing. A large number of traders, users, and investors are joining the market every single day. Since 2009, over 6000 different assets were introduced, thousands of exchanges, protocols, and inventions were introduced. The industry is growing, and it has yet to stop. The ever-growing nature of the ecosystem welcomes many newer users, investors, and traders every day!

Cryptocurrency prices and their factors

A diverse range of reasons often determines the factors that shift the price of the cryptocurrency. It could range from applying an asset in the present day to the use and potential adoption of the asset in the future. There’s a myriad of linked elements that play a crucial role in the fluctuation of cryptocurrency prices. Here are some of the most common reasons that affect Cryptocurrencies.

Supply

The limited supply of cryptocurrencies plays a significant role in deciding its prices. In economics, a basic rule states that a stable or finite supply of any asset increases its value as time passes, assuming that the asset’s demand increases. With a limited number of coins in existence, such as Bitcoin’s 21 million bitcoins, the asset increases its value as it gets scarce.

Mass Adoption and Potential.

A cryptocurrency isn’t just a commodity that is meant to be traded; it was introduced to solve traditional finance’s inherent problems. The market determines a cryptocurrency’s value based on crucial factors such as

  • Functionality and sustainability of the project
  • Partnership, collaboration, or endorsement with credible companies
  • Growth of the market
  • The success of its different versions

These factors play a vital role that drives the product’s demand. The greater the demand, the greater its value. The cryptocurrency price goes up as more people adopt the asset. This factor has been a driving reason behind Bitcoin’s success.

Speculation and media

Speculation is undoubtedly one of the main reasons why the market is so volatile. Investors and traders speculate the prices of different assets by reacting to the price fluctuations through buying or selling different assets. Investors are on the hunt for the next big swing, looking to make huge profits. These speculations cause the market to be a lot more volatile than it usually would be.

Moreover, with tons of speculation at hand, the media has a massive impact on trends and prices of an asset. Investors are on the hunt for the next big headline that will either launch or crash a market. However, when something is announced in the headlines, the race is on to cash in on the opportunity.

Conclusion

The cryptocurrency market is developing despite all the negative media attention it has attracted over the years. With 6000 different assets, the introduction of new protocols, inventions, and a decade later, the asset follows a promising path heading into 2021. However, not much can be said about the market’s volatility, where it is going to head? When will it stop? No one knows, but either way, this market factor allowed cryptocurrencies to find their success.

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