This year marks 15 years since the world was first introduced to Bitcoin. The original cryptocurrency commenced a revolution that changed the financial world forever. Bitcoin’s success saw it reach staggering heights in terms of value over the years and started a frenzy that’s now seen over 20,000 new cryptocurrencies being released.
The modern-day gold rush cryptocurrencies sparked sees everyone from institutional investors to ordinary people all clamoring to capitalize on them. That boom has turned the cryptocurrency market into a sophisticated one that sees the prices and value of cryptocurrencies constantly fluctuating. If you’re curious about what determines the price of a cryptocurrency, here’s a look at the key factors that contribute to it.
Utility
Bitcoin started with a noble aim — to provide a digital medium of exchange free of central authorities like banks. Its popularity and success have seen it become widely accepted as a payment method. It has been particularly widely adopted by the gambling industry, with the sites included on a list of Bitcoin casinos reviews offering players increased privacy and security when gambling. So much so, that Bitcoin has become one of the leading payment methods for online gambling, with many specialized Bitcoin casinos now utilizing it.
From a utility perspective, Bitcoin’s success and spikes in its price have often walked hand-in-hand with its widespread utility in the modern world. You can use Bitcoin for a variety of online purchases, with more and more physical stores now accepting it too. Beyond its initial aims, Bitcoin has grown to have enormous social utility, both as a medium of exchange and as an investment option.
That same principle holds for other cryptocurrencies too. For example, Ethereum has carved out a niche for itself by distinguishing itself through its ability to create smart contracts. A cryptocurrency’s use, therefore, is a key determinant of how much its price rises or falls depending on how much value the market ascribes to its utility.
Supply and Demand
Despite the noble intentions behind Bitcoin’s creation, it’s arguable that it’s now become as tainted by capitalistic market principles as fiat money. The sophistication of the exchanges that sprang up to facilitate its trade largely rests on the ordinary economic considerations of supply and demand. In a simple sense, the more popular and successful it became, the greater the demand for it grew.
However, another key factor that contributed to Bitcoin’s growth is that it has a limited supply. That fact adds to its value since there will only ever be a finite amount of Bitcoin available to purchase. Supply refers to how much of a cryptocurrency is offered and available to purchase. Many offer maximum supplies in the billions and even trillions, while others, like Bitcoin, take the more conservative approach by limiting supply to create scarcity and a higher value as a result.
A Competitive Market
Now that cryptocurrencies have become entrenched as a viable medium of exchange, the markets in which they operate have become increasingly more competitive. Since there are now more than 20,000 different crypto coins and tokens to choose from, each has to find a way to distinguish itself to be successful. That fact has broadened the market considerably, making for a diverse range to choose from, and cryptocurrencies that often seek to offer some niche benefit.
While the most successful and valuable coins may be seen as the premium offerings, there are many other coins available now. With something for everyone, many have low values that can appeal to investors with smaller budgets. As different cryptocurrencies offer different uses and benefits, they broadly place themselves into different categories. As a result, many become direct competitors to each other.
Given Ethereum’s smart contract uses, it competes with other cryptocurrencies like Cardano that do the same. Competition creates a host of market forces that ebb and flow, altering the prices of cryptocurrencies as a result. With its own set of rules and regulations and a variety of unique market forces affecting it, competition therefore plays a large role in determining the price of a cryptocurrency at any given time.
Availability
As an offshoot of supply and demand, the availability of a cryptocurrency also determines its price. In that sense, the more easily available a coin is to access, purchase, and trade, the better its chances are of increasing in value. However, as just one factor, it’s not a given that an easily available coin will always have a high price.
The more popular and successful a coin becomes, the greater its chances are of being listed on an exchange. As a result of the immense success of coins like Bitcoin, many specialized cryptocurrency exchanges have sprung up to cater to their trade. These make those coins far more accessible to the market and facilitate trade, enhancing a coin’s availability and utility.
An X Factor
One of the factors that plays a part in the price of a cryptocurrency is something you can think of as an X factor. This largely refers to its popularity or how it distinguishes itself in some way. For example, coins like Dogecoin started as meme coins but became so popular that their prices soared.
While popularity can ebb and flow, it’s never a bad thing for a cryptocurrency to experience either continuous popularity or bouts of it. These aspects can have enormous impacts on a cryptocurrency’s price. They can also work the other way as scandals or issues that drive down the popularity of a coin can negatively affect its price. Either way, cryptocurrencies are just as prone to market volatility and other variable factors as ordinary stocks are.
Conclusion
There are a variety of key factors that affect the price of a cryptocurrency. Many of these share commonalities with ordinary market considerations and economic principles. However, cryptocurrencies are unique so some factors can be more esoteric.
The relative volatility of the cryptocurrencies makes their trade a sophisticated endeavor. With more than 20,000 coins out there now, potential investors should carefully consider as many factors as possible as the prices of cryptocurrencies are notorious for swinging rapidly in either direction.
