What affects cryptocurrency price?

Crypto prices change quickly, knowing why puts you ahead of the game.

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Although most crypto investors claim to be “in it for the tech”, the reality is that most new investors are attracted by the vast rallies in price. This guide explores what affects cryptos price, explaining everything from how price is determined, to what makes it go up or down.

How is the price of crypto determined?

Bitcoin didn’t have a set price back in 2008-2009. Instead, investors would estimate the going rate. However, following the launch of the first crypto exchange, investors could trade Bitcoin (and other cryptos) like a stock. Prices would be determined by supply and demand.

In its simplest terms, if there’s more supply than demand, the crypto’s price will go down. Whereas more demand than supply means the price will go up.

Things like the strength of the economy, the number of coins in circulation, the purpose of the coin or its perceived value all affect a crypto’s supply and demand.

What makes crypto go up in price?

When we talk about crypto going up in price, what we mean is when demand outpaces supply. Here’s some common causes of when that can occur.

  • Market cycles. Although crypto aims to outgrow traditional finance, it can’t help but follow its cycles. Generally, cryptocurrency follows the equities market, which is a product of global macroeconomics (inflation, interest rates, employment rates etc). Since inflation and interest are cyclical, this means crypto is too.
  • Bitcoin halving. Another cyclical factor that plays into pricing is Bitcoin halving. The event occurs every 4 years and cuts the amount of Bitcoin rewarded to miners in half. The halving event usually causes a Bitcoin supply shock and has historically led to a rise in prices.
  • Hype. From its decentralised autonomous organisations (DAOs) to the open-source nature of blockchains and apps, crypto is a community-driven industry. Hype and excitement around a coin can increase demand, causing the price to snowball.
  • Scarcity. In essence, scarcity means there is a fixed or low supply. Most cryptocurrencies have a fixed supply. Therefore, an increase in demand automatically creates a sense of scarcity, which can make them go up in price.

What makes crypto go down in price?

Similarly to how demand outweighing supply causes a crypto’s price to go up, supply outweighing demand will cause it to go down. We’ve listed some of the most common causes of this below.

  • Market cycles. In the same way, prices go up due to market cycles; they can also push prices down. The main reason for this is that there is less liquidity across the board. Poor macroeconomic conditions lead to high interest rates, this means banks and institutions scramble to repay loans rather than make investments in cryptocurrencies, stocks or any other assets.
  • Token emissions. Despite having a fixed supply, many cryptocurrencies still have new coins coming into circulation each year. For layer one coins like Bitcoin and Ethereum, this happens through mining or staking rewards. But for decentralised applications, this occurs through an unlock schedule. As tokens are unlocked, the receiver may sell them, adding to the available supply. If too many tokens are released at once, or it coincides with a drop in demand, this could cause the price to drop.
  • Poor design. Another reason a cryptos price may go down is simply if it wasn’t any good. For example, the source code could be poorly written or there may be no market for the coin. This can cause a sell-off in the coin, and the decreasing price can make other investors lose confidence, resulting in an even lower price.
  • Rug pull. The project’s developers could abandon the project, either immediately after launch or months or years later. This is known as a rug pull and usually leads to the coin losing all value.

How does cryptocurrency supply affect its price?

A cryptocurrency with a fixed supply can result in more significant growth if demand spikes for the coin. On the other hand, an inflationary coin with an increasing supply could hold down the price, despite increasing demand.

Another important factor to consider is the coins unlock schedule. Many newer coins may have a 12-18 month unlock schedule. It’s crucial to know how many coins will be released in the short and long term, as this could significantly affect the price.

How is cryptocurrency valued?

The price of a crypto is an equilibrium or agreement between buyers and sellers at that moment. When a price remains relatively steady for some time, buyers and sellers agree that the zone is the fair price for the crypto.

However, periods where the price is rapidly rising or falling mean that the buyers and sellers agree that the price should be higher or lower.

These price changes have several causes, but they are all either fundamental or technical.

  • Fundamental causes. These concern news relating to the coin or economy, an increasing or decreasing supply, or a change in the coin’s utility.
  • Technical reasons. These relate to the coin’s price chart. The main factor affecting the coin’s value on a price chart is when the price approaches a key level of support or resistance from which it previously bounced. These levels often lead to volatility and can quickly cause the crypto’s value to change.

How does a cryptocurrency gain value?

For a crypto to gain value, its demand must outweigh supply, but what would this actually look like? Markets are dynamic, so many variables can determine if cryptocurrency’s price will go up.

  • Supply and demand. A cryptocurrency will gain value if there are more buyers than sellers in the market. This is the overarching theme of crypto price, and the other factors we mention below play into it.
  • Internal governance. Each cryptocurrency has its own internal governance structure; many use some kind of decentralised autonomous organisation (DAO). If the DAO makes responsible and positive decisions about the direction of the coin, it can lead to increased demand for it, thus boosting its price.
  • Competition. Coins like Ethereum and Bitcoin had a first-mover advantage. This means they were able to grow quickly without fear of competition. Other cryptos in low-competition fields may also be able to gain value quicker than those trying to become the next Bitcoin or Ethereum.
  • Increasing utility. Coins with built-in utilities like paying for gas fees or as a means of payment provide an organic stream of demand that can help its price to grow over time.
  • Emissions. Many cryptocurrencies have a circulating and max supply. The max supply combines coins currently on the market (circulating) with those to be released in the future. If most of the supply is already circulating, then the price is less likely to be held down by sell pressure and could increase more in the future.

Do crypto prices go up the more people buy?

More people buying a crypto means greater demand, and since most cryptos have a fixed supply, this often increases the price.

Nonetheless, it is essential to remember that somebody is on both sides of a trade. If the price increases, it could awaken more sellers who have already made a profit, increasing supply and pushing the price back down.

Bottom line

Overall, crypto prices are a product of supply and demand. There are countless factors affecting both, but one of the main reasons crypto prices have moved so quickly in the past is their limited supply and community-driven hype.

Frequently asked questions

*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.

Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Written by

Elliott Lee

Elliott Lee is a freelance writer specialising in cryptocurrency and fintech. He's been involved in the crypto industry since early 2020, and his work has been published on a range of sites. His particular interests are DeFi and exploring how cryptocurrency can solve real-world issues. Elliott also loves to travel and learn about different cultures and languages, and he's always trying new sports and activities. See full profile

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