Just a quick look at the cryptocurrency market can be overwhelming for many investors. They want to see what the value of a token is and that is sometimes the limit of their interest. Others want to know what accounts for the value of Bitcoin and other digital currencies. What are the specific factors that can make the value of a cryptocurrency rise and fall? Let’s take a look.
Bitcoin Supply and Demand
Supply and demand comes into play with every type of monetary investment. With cash there is an exchange rate between fiat currencies. It is possible for central banks under the direction of governments to influence exchange rates. Gold is traded in a market that also revolves around how much gold exists and how much is controlled by investors.
Bitcoin and other digital currencies are a little bit different, but supply and demand does influence the market. Bitcoins are created at a rate that is fixed. This rate cannot be changed at will. It can only be halved at specific points in time. As halving occurs there are fewer Bitcoins being created through mining.
There could be instances of when the demand for Bitcoin would exceed the supply of the token. This could drive the value of Bitcoin higher. In fact, during previous period when the rate of Bitcoin was halved there have been increases in value, although the currency tends to level out in the months following.
The takeaway here is that there is a fixed number of Bitcoin that will ever be created. No treasury can simply print up money to slip into the market like they can with fiat.
It is also possible in some scenarios that competition could drive up the price of Bitcoin. How can Bitcoin have competition? It’s the world’s first and most-recognized cryptocurrency. Crypto tokens don’t compete with one another, do they?
In a sense, no. In another way the introduction of new digital assets does have the ability to affect the price of Bitcoin by driving down demand. Investors can become more inclined to spread out their investments between many different tokens. They diversify their portfolios and Bitcoin takes up a smaller percentage. Less Bitcoin being bought and sold can affect market price.
There is another element at play here that many people don’t consider. If we are talking about competition among digital assets then we also have to factor in competition among the developers of blockchain technology. This is the underpinning of all cryptocurrencies, and blockchains have many applications that go beyond digital assets.
If a cryptocurrency’s blockchain begins to be adopted as a model or platform for financial and other services, the interest in that cryptocurrency can rise. Just look at Ethereum for evidence of this. Ethereum’s blockchain has been used as the protocol for many new altcoins, allows Smart Contracts, and lets developers create apps. There is little doubt that blockchains will continue to become more advanced. This can affect the price of Bitcoin and other tokens in the market.
You may hear a saying from cryptocurrency investors that goes something like this: as Bitcoin goes, so goes the crypto market. This is true in some cases but not all. Don’t assume that the value of an altcoin will go up just because the value of Bitcoin is rising.
The Popularity of Cryptocurrency Exchanges
There are cryptocurrency exchanges today that drive the market. Some of these exchanges have been around for a few years, others are just starting up. More crypto exchanges means more opportunities for individuals to trade crypto. More trading means the potential for more fluctuations in the price of Bitcoin.
If a crypto exchange were to become very popular among investors, say a Kraken or a Coinbase as examples, that exchange begins to draw the interest of major players in the crypto market. A network begins to develop. That exchange gains more respect and notoriety. When this happens the exchange can make the rules about whether new crypto tokens can be added to the exchange for trading.
There are regulations being developed right now that are a response to this very thing. SAFT, or the Simple Agreement for Future Tokens, is trying to set standards for ICOs and the compliance of new digital assets with regulatory agencies. As it becomes harder for some new tokens to enter the cryptocurrency market, the response could be an affect on the prices of Bitcoin and all tokens.
Another brief word about crypto exchanges. They are also unique in the fact that they allow small investors to purchase fractional amounts of Bitcoin. In the stock market you can’t really purchase 0.0035 shares of AT&T, but you can get that amount of Bitcoin. Smaller investors joining the marketplace can have an impact on price.
The Regulation of Cryptocurrency
The mention of SAFT and regulatory agencies leads us to attempts to regulate cryptocurrency and its use. Yes, crypto is a decentralized, deregulated asset. That is how it was designed and that is how most people would prefer it to remain. But governments have taken notice of the interest in cryptocurrency and now they are starting to take action.
Some governments are progressive in their attitude toward crypto. Others are openly hostile. The attitude of governments can also have an affect on Bitcoin price. In particular, the United States would prefer that the Securities and Exchange Commission, the SEC, handle matters related to new crypto offerings and exchanges. The market is already feeling that influence, and sometimes prices can be affected.
The US is another example about the general confusion of where to classify Bitcoin as an asset. Is it a commodity? Some agencies think so. Is it a security like a stock or a bond? The SEC says yes. It could take years for governments to flesh out their own responses to crypto, and with each new development there is potential impact on Bitcoin’s price.
Stability, Scaling, and Halving
Stability, scaling, and halving are all terms that you may be mildly familiar with. They basically all refer to Bitcoin’s overall governance as the years pass. Governance of Bitcoin is not placed in the hands of a few important people. Many of the decisions about the management of the token are built right into the blockchain itself. For example, halving happens automatically according to a schedule. The halving reduces the number of new Bitcoins being created, and this can affect price.
Other things like scaling issues are projects that require some third-party involvement in the sense of creating solutions. One of the big problems with Bitcoin is that it doesn’t process transactions fast enough to be competitive with other methods of payment processing. So, new solutions like the Lightning Network have to be created to help manage this problem. Developments like these can affect the price of the coin.
If something were to emerge that revealed an instability in the Bitcoin blockchain, that could also impact price. All of these things are elements that potential investors should keep an eye on.