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A central government or authority does not control cryptocurrencies, and they have a fixed supply, which makes their devaluation via inflation mostly nonexistent.
Many people consider cryptocurrencies short-lived and unreliable, mainly as it could be unclear what affects their value. Besides, many enthusiasts don’t know if it is possible to predict future crypto prices.
Crypto prices primarily depend on the value consumers place on them. A positive attitude from society is, therefore, vital to the value of crypto assets.
There are also many other objective factors affecting their worth. Let’s analyze five factors that have a significant impact on cryptocurrency prices in 2020.
Supply and Demand
Just in case you forgot, let’s start at the most basic level of economics. Supply and demand play essential roles in the value of a cryptocurrency. Fundamentally, the price of a coin will be determined by its availability. The harder it is to obtain, the higher the price. Less demand and higher supply mean lower prices.
Take the disparity between Bitcoin and Ripple, for instance. Bitcoin has a cap of 21M tokens with less than 4M pending to be mined. For this reason, BTC has a very high value since the supply remains the same as the demand goes up.
Ripple’s XRP, on the other hand, has a cap of 100 billion tokens, with approximately 44 billion in circulation. This is why XRP is at a modest price of $0.20 at the time of writing.
Another huge factor contributing to a cryptocurrency price is how ‘whales‘ influence the supply and demand of coins in the market. Whales are crypto wallet owners who hold around $1 billion worth of coins in the wallets. They make it very difficult to put any price target on the cryptocurrency.
Per Wimmer, the founder of Wimmer Financial LLP, explains:
“The crypto market is dominated mainly by ten big whales or privates. They are massive in the market and take up a lot of space and volume, so if you take the top 10 or even 50, you will have a lot of the volume covered already. It is too easy to manipulate the market so far”.
If the government controls cryptos too much via regulations, it could negatively affect a coin’s price. On the other hand, if countries regulate it better, it could encourage new users.
Just last month, the Federal Reserve Bank of Dallas published a report showing how cryptocurrency markets are affected by crypto regulatory actions. The working paper entitled “Cryptocurrency Market Reactions to Regulatory News” found that the markets respond strongly to news events regarding cryptocurrencies’ legal status.
News of general bans on crypto use, whether or not they are currencies or strict anti-money laundering measures, also have substantial adverse impacts on price. The report further noted that news indicative of possible legal frameworks for cryptocurrencies or initial coin offerings (ICOs) coincides with losses in crypto markets.
An excellent example of the impact of regulations is in China. The country has repeatedly cracked down on cryptocurrencies, with a market crash following most announcements.
For example, in February 2019, China blocked all websites relating to trading in crypto, prompting an immediate 15% fall in bitcoin and a 20% drop in ETH. Previous prohibitions of initial coin offerings (ICOs) had a comparable adverse effect on their value.
Nonetheless, the Bank of Dallas report clarified that regulation need not be seen as bad news for the crypto markets, with price responses particularly gesturing to an apparent inclination for a clear and well-structured legal status.
Political Change & Unrest
Cryptocurrency is just over ten years old. Thus, the effects of political events on the crypto prices have not been studied extensively due to more traditional assets.
However, analysts use historical context to make sense of what may occur in the digital assets markets due to the political unrest and regime changes, both expected and unexpected.
The impact of political changes and upheaval on crypto markets has much to do with digital cash’s ability to resist inflation and centralization imposed by central banks.
For instance, in countries experiencing economic crises (for example, Venezuela and Zimbabwe), BTC has been a popular option for protecting savings. It is freely accessible, stress-free to store, and easy to sell.
Central Bank Monetary Policies
In the wake of Covid-19 and the subsequent global economic shutdown, central banks worldwide have increased money supply, which will further drive prices of cryptocurrencies such as bitcoin.
Traditional currencies are devalued, and inflation fears rise on the back of the mass printing of money. In the U.S., the nation’s central bank has added trillions of dollars to the money supply.
Such measures will inevitably encourage even more investors to consider decentralized, non-sovereign digital currencies. For instance, Elon Musk recently noted via Twitter that massive fiat currency issuance by governments and central banks had made bitcoin “sound solid by comparison.”
Cryptocurrencies are increasingly becoming regarded as the future of money due to the real-world issues they address and growing mass adoption. Indeed, there has been speculation that bitcoin could rival gold as it has recently ‘reset’ its fair value and reputation as a haven asset during impending inflation of the U.S dollar.
User Adoption and Utility
Another critical factor influencing the price of cryptocurrency is user adoption by institutions and the general public. The popularity of a particular digital currency can drive prices up, whereas if the demand for the coin is low, it can decrease the value.
Currently, individuals, governments, institutional investors, and multinational corporations are increasingly adopting crypto. Therefore, it is evident that the most widely adopted digital tokens’ price will be pushed higher and higher.
Similarly, a utility can play a significant role in the value of a digital asset, as each cryptocurrency usually has a use case in the real world. If a coin serves no purpose, it is likely to have a lower price or fizzle out of the market over time. In short, the more significant the role of cryptocurrencies, the higher the cryptocurrency market cap.
Bitcoin’s purpose is to offer a peer-to-peer cashless system that could utilize complete digital money. Ethereum allows people to create their own decentralized applications. If a cryptocurrency has a practical use, such as these two examples, it will likely reflect on its price on the market.
Cryptocurrencies were nonexistent a little over a decade ago, and they have certainly come a long way since then. In this guide, we have elaborated on what affects cryptocurrencies’ values to give investors a better understanding of what they are getting into.
Admittedly, digital currencies’ value can be very volatile, depending on a host of central bank regulation and geopolitical factors.
That said, this volatility shouldn’t be taken as an entirely negative thing, as it allows traders to experience a more significant return on their investments.
When the price is fluctuating, the most important thing is to stick to your original investment plan.