Factors Affecting the Cryptocurrency Market

Factors Affecting the Cryptocurrency Market

A number of people have made money from the cryptocurrency market, and they do so through investing in or trading crypto-coins and crypto-tokens, participating in proof-of-work blockchains as miners or in proof-of-stake blockchains as validators, and in creating and selling or acquiring and trading non-fungible tokens or NFTs.

Cryptocurrencies are digital assets. However, not everyone can earn from them. Others have even criticized cryptocurrencies due to their extreme volatility and the negative environmental impacts of PoW-based blockchains. There are also key factors affecting the cryptocurrency market or the prices of crypto-coins and crypto-tokens.

What Moves the Cryptocurrency Market: The Factors that Influence the Price and Value of Cryptocurrencies

Supply of a Particular Cryptocurrency in Circulation

Two general factors determine the value of assets in modern-day economics. These are utility and scarcity. Similar to fiat currencies, cryptocurrencies have a utility because they can function as a medium of exchange, store of value, and a unit of account.

But utility alone cannot determine the value of a particular asset. The availability of supply is also an important factor. The Law of Supply and Demand states, all else being equal, the value of an item tends to increase when the supply of that good decreases.

Precious metals such as gold and silver have a higher value than copper and iron because they are rare and harder to extract. In fiat currencies, the total number of a particular currency is in circulation can affect its value and influence inflation.

The same is true for cryptocurrencies. Their value is affected by the total number of a specific crypto-coin or crypto-token in existence and the rate at which it is released and lost. So-called deflationary cryptocurrencies such as Bitcoin can increase in value in the future.

Note that there is a supply cap to Bitcoin. A deflationary cryptocurrency is a form of cryptocurrency with a depreciating supply of coins. As the number of these cryptocurrencies in circulation decreases, they become more valuable because of scarcity.

Current and Assumed Future Market Capitalization

Market capitalization is the total dollar market value of all of the units of a particular asset. Originally used to represent the total value of all of the shares of a company, it is also an indicator that measures and keeps track of the market value of a particular asset.

In a particular cryptocurrency, it represents the total value of all the coins or tokens that have been released. It is calculated by multiplying the number of coins or tokens in circulation by the current market price of a single coin or token.

Bitcoins is the largest cryptocurrency in the world in terms of market cap. The Ether cryptocurrency of the Ethereum blockchain ranks second, while the Ada cryptocurrency of the Cardano blockchain ranks third.

All of the aforesaid cryptocurrencies have become highly valuable. Their respective market cap alone is an indicator of their expansive use and wide acceptance. Remember that utility is one of the two general factors that determine the value of an asset.

Hence, market cap influences the cryptocurrency market, especially the value or price of a particular cryptocurrency, because it provides some sort of a guarantee not only of utility but also of stability, as well as an opportunity to perceive its future development.

Cryptocurrency Market and Modern Economic Integration

To reiterate, utility party determines the value of a particular asset. A number of coins and tokens have been introduced to the public. There are even thousands of them in circulation. However, not all of them have proven value or worth.

For a particular cryptocurrency to increase in value, it needs to have public acceptance. This is the reason why even non-pioneers and new-entrants such as Dogecoin have become more valuable in a shorter period than older coins and tokens.

It is also important to note that public acceptance can be determined by how a particular cryptocurrency integrates with the modern economy or more specifically, how it integrates with existing macroeconomic systems and business transactions.

Bitcoin remains valuable because it is an accepted medium of exchange in several e-commerce and digital payment systems. Furthermore, Ecuador has adopted this cryptocurrency as an official legal tender alongside the United States dollar.

The value of Ether has also been increasing on average because of the numerous and emerging applications of the Ethereum blockchain platform, as well as the crypto-tokens and non-fungible tokens based on this platform.

Media Portrayal and Support from Prominent Personalities

The overall value of the cryptocurrency market can also be influenced by the press and statements of support from prominent personalities, as well as support from reliable institutions. Media portrayal and the degree of coverage can promote or demote public acceptance.

Prices of the Ethereum-based AXS and SLP crypto-tokens due to the increasing press coverage and subsequent negative media portrayals of the NFT-based video game Axie Infinity. The media remains an influential source of public information

Support from prominent personalities can also sway the public to accept a cryptocurrency. Consider Dogecoin as an example. Tweets from Elon Musk and Mark Cuban have driven the value of this cryptocurrency due to an increase in public demand.

Note that similar support from Musk drove the value of Bitcoin further. He noted that Tesla will mostly accept this cryptocurrency again. However, in a previous pronouncement, its value slightly decreased after people assumed that he was withdrawing support.

Cryptocurrency Market and Key Political and Economic Events

It is easy to assume that cryptocurrencies are free from the influence of political and economic events that affect fiat currencies because they are decentralized. Remember that they use a distributed ledger based on blockchain technology.

However, major political and economic developments have proven otherwise. Regulatory updates would certainly affect the cryptocurrency market, especially if a specific government accepts or rejects cryptocurrencies as digital currencies.

The controversial Evergrande Debt Crisis in China negatively affected the price of Bitcoin on 21 September 2021. It went down by 8.1 percent. The prices of Ada and Dogecoin fell more than 24 percent within the 24-hour period of 21 September 2021.

Note that major political and economic events affect the cryptocurrency market similar to how they affect traditional financial markets such as stock markets across the globe, the foreign exchange markets, and even property markets, among others.

Fundamentally, in each key event, traders and investors would either buy more of a specific asset, especially if there are favorable developments that warrant positive expectations, or sell, particularly if there are unfavorable developments warranting negative expectations.

The volume of trading or buy-and-sell instances, as well as buy-and-hold or pump-and-dump situations, affect the supply and demand of a particular asset, thus affecting its price. As mentioned above, supply is a key determinant of value.

What Makes the Cryptocurrency Market Extremely Volatile: The Impact of Speculation in the Price of Cryptocurrencies

Extreme volatility is one of the key criticisms of cryptocurrencies. Several analysts and industry observers have cautioned people from investing in the cryptocurrency market, arguing that despite exhibiting the same characteristics as fiat currencies, crypto-coins and crypto-tokens have no beneficial use case apart from speculation-driven trading.

The historical prices of cryptocurrencies reveal substantial upward movements and almost immediate downturns. Due to these extreme price movements, the risks involve in trading and investing in these assets are considerably high. There is one primary reason why the cryptocurrency market is high volatile: it thrives on speculation.

Investors and traders are essentially betting that the prices of specific coins and tokens would go up or go down to make profits. Media coverage, pronouncements from notable personalities, and key events readily influence the decisions of these individuals. These speculative bets can either result in a sudden influx of money or a rapid outgo, thereby leading to high volatility.

FURTHER READINGS AND REFERENCES

  • Enoksen, F. A., Landsnes, Ch. J., Lučivjanská, K., and Molnár, P. 2020. “Understanding Risk of Bubbles in Cryptocurrencies.” Journal of Economic Behavior & Organization. 176: 129-144. DOI: 1016/j.jebo.2020.05.005
  • Locke, T. 2021. “Dogecoin Rallies after Elon Musk Agrees with Mark Cuban that It is the ‘Strongest’ Cryptocurrency as a Medium of Exchange.” CNBC. Available online
  • Nguyen, T. and Ranjini Thaver. “Factors Affecting Bitcoin Price in the Cryptocurrency Market: An Empirical Study.” International Journal of Business and Economics Perspectives. 13(1). Available online
  • Sovbetov, Y. 2018. “Factors Influencing Cryptocurrency Prices: Evidence from Bitcoin, Ethereum, Dash, Litecoin, and Monero.” Journal of Economics and Financial Analysis. 2(2): 1-27. DOI: 1991/jefa.v2i2.a16