If you’re going to invest in cryptocurrency, you need to have a good understanding of the driving forces behind prices in the market. Many different things can affect the prices you’ll see, but many of these influences are different than those that affect stocks and currencies. Therefore, it is important for investors to know what to watch for to make the best trading decisions.
Announcements or Changes
Many cryptocurrency providers are constantly working to improve their products. For example, the Bitcoin halving event is set to take place in May of 2020. When cryptocurrency goes through updates or transitions, this affects the price. This can go in one of two ways: successful updates may drive the price up as more traders feel confident in the cryptocurrency, or failed projects and technical problems with updates may lead some to walk away from the product altogether.
Supply & Demand
Supply and demand is a common influence behind the price of stocks, forex, and cryptocurrencies. This concept generally revolves around the fact that an abundance of something causes a decrease in value, while a shortage increases the value. During the COVID-19 pandemic, some grocers raised the price of meat or other items more than 50% because hoarding and reduced production caused a shortage of those products. While that price inflation was technically illegal in our example, this is how supply and demand affect the price of cryptocurrencies. Mining also influences supply and demand.
Bitcoin received harsh criticism when it was discovered that many consumers were using it to purchase illegal drugs or to pay for other illegal online services thanks to it being more private than traditional banking. When drama or unbecoming stories break, it can cause a decrease in the currency’s value and cause some investors to walk away. On the other hand, good publicity can have the opposite effect.
Like with any type of asset, the news is one of the main influences behind prices. In the case of cryptocurrency, news can give us insight into what is going to happen. A bad economy or decrease in the value of a major currency can push many traders to invest in cryptocurrency instead. This is something that you’ll want to keep a close eye on because of how significantly it can affect the prices.
High Profile Investors
Often referred to as ‘whale investors’, this category usually includes corporations or individuals with a lot of capital. These investors have a large influence on the market because they either invest a large sum into the market or sell a large amount. If these investors buy, it means that they believe the market will go up, while selling indicates the opposite. Many of these investors have more resources at their disposal, so it is a good idea to pay attention to their moves so that you can benefit.
There are a few other factors that can affect the price of cryptocurrency:
Hard Forks: This involves a blockchain being split in two, like when Bitcoin was split with Bitcoin Cash or Ethereum and Ethereum Classic. If there is any drama behind the split, then this can be a cause for concern.
Competitors: If a new cryptocurrency hits the market or an existing one improves their services it can draw some investors away from other options.
How it can be used: If a cryptocurrency has multiple uses, investors may be more likely to buy.
Security: Any cyber-attacks or hacking problems with a cryptocurrency will make traders more fearful of investment or it will cause investors to sell, which will cause the price to go down.