Many factors cause crypto price fluctuations. It is even greater among smaller cryptocurrencies, while one can see 5% or 10% fluctuations each day in major cryptocurrencies like Bitcoin. Therefore, it shouldn’t come as a price to see major fluctuations in cryptocurrencies, and as an investor, you need to be aware of it. The question arises about what causes these fluctuations and why cryptocurrencies are volatile..
Value of cryptocurrency
Cryptocurrencies are not centralized and don’t have a central authority. While currency backed by the government has established trust among the masses on spending, cryptocurrencies get their value from other aspects. Being decentralized, their value depends on the following factors:
- Supply and Demand
- Production/Mining Costs
- Exchange Rates
Supply and Demand
Just like any other commodity, the value of cryptocurrency also depends on supply and demand. When the demand goes high and supply is low the value increases. Similarly, cryptocurrencies also have the same strategy wherein their value increases when their supply is lowered, and demand is higher.
Multiple factors contribute to its supply, including mining, exchange rates, and more. However, supply is a known factor in some cryptocurrencies. For instance, there can only be 21 million Bitcoin, while for ETH, there is no cap for supply.
At the same time, some cryptocurrencies make use of a burning mechanism that manages the supply and slows down inflation. Hence, depending on the demand of the cryptocurrency, the tokens can be managed by either releasing new tokens or burning existing ones.
Mining cryptocurrencies plays an important factor in determining their value. Mining cryptocurrency refers to solving complex math problems on the computer to verify the next block on the blockchain and generate a token.
Unfortunately, the complexity of the math problem increases, which demands powerful equipment and higher energy needs like electricity. This adds to the mining costs and increases competition making it even more difficult to mine cryptocurrency.
Therefore, miners will only consider mining a cryptocurrency if its value exceeds the cost spent on mining them. This inevitably leads to values going up since miners are essential for blockchain functioning.
Cryptocurrency markets exchange among popular platforms like coin base is gaining traction as more cryptos are introduced into the market. Leading cryptocurrency exchange is happening between BTC and ETH. This also incorporates the ease of exchanging, exchange fees, and investing costs.
Therefore, investors see exchange opportunities to make profits. The ease of exchanging crypto increases its demand. Therefore, as the demand increases, so does its value. While demand fluctuates, so does its value as they are directly proportional.
Cryptocurrency acceptance among the masses
The cryptocurrency value depends on its popularity among the masses. For instance, more investors will pull out if its popularity is lowered, thereby causing a lower value. Furthermore, according to Pulsar, the user’s social media sentiments greatly impact the value of cryptocurrency and contribute to its fluctuations.
Therefore, high-profile celebrities, influencers, or even popular tech billionaires like Elon Musk can contribute to the fluctuating prices of cryptocurrency. Hence, investors should buy on an impulse.
Political Views and Opinions
Environmental concerns about energy spent on mining cryptocurrency can also create a backlash among the masses. As a result, investors pulling out can majorly impact its value. According to Pulsar, the impact of social media on the value of cryptocurrency takes two to three days to reflect.
Regulation and Governance
The cryptocurrency regulations have sparked a polarised view as SEC reviews it as security while CFTC views it as a commodity. This polarised view affects the regulation of cryptocurrency, thereby impacting its value. In addition, regulations enable investors to transact easily and take short positions. Apart from this, governments disfavouring cryptocurrency can cause a huge impact on its value.
Cryptocurrencies have a viable future and are still in need of acceptance among government bodies, media attention, usage, and other factors. All of this contributes greatly to its value fluctuations. Hence, many investors should invest 5% of their portfolio in cryptocurrency. It is a diversifying market and needs close observation..