Understanding the Supply and Demand in Cryptocurrencies

Cryptocurrencies are units of exchange and hold value because people decide they do. While any other currency or asset type does not back others like Bitcoin, stablecoins are backed by such currencies or assets to stabilize them against the highly volatile nature of the digital currency.

According to the law of demand, all other factors withstanding, highly-priced resources have less need. Similarly, the law of supply states that the quantity supplied is directly proportional to the price. Therefore, this means that in the law of supply and demand, as much as people will avoid acquiring highly-priced goods that would make them give up something else of more excellent value, producers will generate higher revenue by selling more at a higher price.

Traditionally, the value and price of something go hand in hand, but it does not always guarantee that all highly-priced things are still valuable and all low-priced things have less value. This introduces market speculation and predictions of supply and demand.

Since the bottom line of cryptocurrencies as units of exchange is trading, the price will go up when more people are looking to buy, and others are willing to sell. However, prices will go down if more people are looking to sell cryptocurrencies and fewer are ready to buy.

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Regional and global economic factors that affect fiat currencies also affect cryptocurrencies, and in most cases, the relationship is directly discernible. Such include inflation, disease outbreaks, political unrest, the discovery of natural resources, and sanctions. However, some factors are unique to cryptocurrencies, some of which are discussed in the following extract.

How volatility affects cryptocurrencies

Volatility measures the extent to which a currency fluctuates over a specific amount of time. Some of the most volatile investments are cryptocurrencies, ForEX, stocks, and derivatives. On the other hand, assets like Cash, Savings accounts, gold, and bonds are stable investments.

Many people, especially in the traditional markets, consider the cryptocurrency market highly unreliable and unstable due to its history and tendency of wildly fluctuating prices. It is common to see cryptocurrency prices going up with increased popularity. As a result, more people try to get in as soon as possible before prices rise further, and they miss out on the chance to make greater profits in the future.

The crypto market is relatively young, but it is growing fast. Despite much uncertainty and speculation, cryptocurrencies like Bitcoin have heard massive growth rates and crushes in a short period.

For example, for the first time, cryptocurrencies experienced the most significant market collapse in 2018, which saw the crypto market capitalization fall from a staggering $813 Billion to $100 Billion. The price of almost all coins dropped by 90%, and most coins haven’t been able to recover their general costs like they were before the 2018 cryptocurrency crash.

Block reward halving

Cryptocurrencies are viewed and probably hard to understand and explain to the general population. However, cryptocurrency’s growing interest and advantages and the hype of quick profits have attracted tremendous interest. This has opened up limited opportunities to people who can navigate the market, and as a result, many have become wealthy from investing in them.

Most cryptocurrencies have a limited total supply, with a narrow, defined divisible capacity, which guarantees that their ability to spread further depends on how high their price will be. One of the ways to earn cryptocurrency is through mining. Block reward halving reduces the rewards miners get by 50% to reduce the supply of coins and increase the price. Supply and demand, just before and after the halving event, affect the price of crypto.

Endorsement

Endorsements can positively affect cryptocurrencies, especially when celebrities or experts in some disciplines say something about them, which might cause a price hike as more people start to invest in them.

However, endorsing can be used as a disguised advertisement of coins that have less value than indicated. Such instances mislead inexperienced investors, creating a temporary demand and leaving them with coins with no immediate high returns as the endorsement claimed.

Endorsements can also happen indirectly in the form of a famous brand launching their cryptocurrency, such as with football fan tokens and social media giant Facebook launching Libra. Such coins are anticipated by their vast customer base and will likely be in high demand and supply and feature a steady rise in their prices.

Pump and dump

Cryptocurrencies are elegant, inclusive, convenient, anonymous, cheap to transact with, and represent limitless opportunities for individuals and the world economy. Each cryptocurrency is built on its network and serves a particular purpose. Unfortunately, they are also highly unregulated, which means many loopholes open the field for making quick money through borderline manipulative and illegal schemes.

Pumping and dumping is a scheme that often happens on cryptocurrency exchanges. It involves targeting and convincing unsuspecting investors to buy a particular asset to artificially inflate its price and sell it after it has risen enough. It is prevalent and profitable and usually creates a demand for a specific coin until it is all sold at once and deflates. This is often done in the form of Initial Coin Offerings (ICOs). Bloomberg’s report showed that in 2019, close to 50000 pump and dump schemes on the Telegram messaging app.

Final Thoughts

In conclusion, It is clear that cryptocurrencies, as much as they are revolutionary, are currently still bound to traditional market advantages and disadvantages. Nevertheless, they are exciting, convenient, and profitable for short- and long-term investment plans.

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However, investors should be careful since not all supply and demand is genuine, and just as many people have lost their wealth to cryptocurrency scams as those who have made a fortune. Nevertheless, as the technology that will usher in the fourth industrial revolution, it seems that according to the law of supply and demand, cryptocurrencies are in for a revolutionary and exciting new decade.