With digital currencies remaining a hot topic of conversation, more and more people are deciding to invest every day. While many people may find themselves excited about this new opportunity, a lot of newbies may find themselves left wondering why the prices are so volatile. There are a plethora of factors that drive the value and price of cryptocurrency, such as supply and demand, energy usage, difficulty of mining, public perception, and much more.
Supply and Demand
Supply and demand is defined as “the amount of goods and services that are available for people to buy compared to the amount of goods and services that people want to buy”. If the amount available is lower than what is demanded by the public, prices are higher by the laws of supply and demand. In cryptocurrency this simply means that the amount of a certain coin available to be mined verses the demand for this coin will affect the price of said coin.
For example, Bitcoin has 21 million whole units, that can be divided 100 million times. If 1 billion people were to adopt Bitcoin, the available units would be spread quite thin, causing the price per coin to rise significantly to meet the demand.
To put it simply, it takes energy to secure blockchains. Mining each coin takes a certain amount of energy. This usage is increased with the difficulty of mining, which in turn will drive up the price of that coin.
Difficulty to Mine
The more secure a blockchain is, the harder it is to mine. This difficulty level affects the value of a cryptocurrency in several ways. The increase of energy used to mine these more difficult chains raises prices, as well as the perceived value of more secure blockchains by the public.
It may seem obvious, but if a currency is hard or impossible to use, it’s value may plummet to little or nothing. Be it for investments or payments, cryptocurrencies must be useful to be valuable.
Many argue that the public’s perception of a cryptocurrency could have the biggest impact on the value of that currency. That is simply to say that the reputation of a currency affects how much the public is willing to pay. Well known currencies such as Bitcoin, Litecoin, and Ether, for instance, are going to have a price that reflects their popularity. Conversely, startups and smaller cryptocurrencies may have a small following but are rarely known by the general public, keeping the price to and market cap low. A major factor in the public perception can be media coverage. Like any other product or service, the media reporting on Bitcoin and other major cryptocurrencies in either a positive or negative way will push the prices up or down.
Market dilution will naturally affect currencies such as Bitcoin, Litecoin,, and Ether significantly less than smaller currencies. With new cryptocurrencies becoming available every day, many without any real innovation or increased utility, new currencies may struggle to gain any traction.
Some cryptocurrencies are developed to scam users into investing in a coin with grand promises of the most advanced technology. These scams are often “premined” by developers, meaning they hold a large amount of the coin supply before the market release. When the coin is gains in value, they quickly dump their coin causing a crash in value for investors and theoretically earning them large amounts of money. These scams are hard to prove at this time, and in some places even impossible. You can read about other scams in this article.
Not only can these scams cause the price of the currency being “premined” to fall when they are exposed, the publicity can negatively impact the perception of cryptocurrency as a whole, decreasing the value.
Although this applies to all cryptocurrencies, it is especially so in smaller ones. Investors can (inadvertently or intentionally) affect the price of a currency in a number of ways. With a large amount of capital, they buy large percentages of the supply and promote the coin in hopes that they fluff up the price. Sometimes a large investment in smaller coins can cause unprecedented rises or falls in price unexpectedly. Lastly, when people see that investors are confident to invest in a coin, they may find themselves encouraged to follow suit.
The value and price of cryptocurrency has numerous factors. We’ve covered many of them, but in short the value of these currencies is defined by consumers. Whether the supply isn’t meeting the demand, a negative report causes a major blow to a currencies reputation, or an investor causes a huge surge in the pricing, the driving force of this industry is the people investing and trading for a multitude of reasons.