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What influences cryptocurrency prices? | Alexa Blockchain
Observing the state of the cryptocurrency industry, especially from an outsider, can be very interesting. On the one hand, we cannot necessarily see or touch crypto assets. On the other hand, these digital assets can be worth millions of dollars and drive an entire industry.
As Kane Pepi points out, if you’re investing from one place where price is the key factor, you will find many affordable tokens on the market. If you are in a financial place where you can invest more money, there are tokens that will cost you thousands of dollars. But what makes cryptocurrencies cheap or expensive, and what drives changes in these prices? We analyze it in this article.
Supply and demand
One of the biggest factors influencing the price of cryptocurrencies is the supply and demand of the token in question. It is a classic market rule that when supply is less than demand, the value of an asset increases and this also applies to the cryptocurrency sector. If you take a look at the whitepaper (essentially the manifesto) of any blockchain project, you will likely see the team’s plans regarding releasing the token to the market to handle the offering.
In the case of Bitcoin, for example, the quantity of tokens released per block is strategic cut in half approximately every 4 years. This reduction in supply has been associated with a spike in the value of Bitcoin and has also been adopted by other cryptocurrencies. On the demand side, there are several factors that can stimulate demand for a token, particularly its utility.
A token like Solana, for example, is in high demand for use in online casinos, for purchasing goods and services, in the DeFi space, and much more. The greater the demand for a token, the higher its price. So, when you see the price of a token increase, it is due to the demand for it also increasing.
Another thing that influences the price of a cryptocurrency is media reports about it, its founders and its native project. It is not unusual for the media to impact investor decisions, and the cryptocurrency industry sees the same effect.
The media often speculates about possible changes to the price of a token and this can trigger a run to the down or up. If the media says that a certain token is the next big thing, for example, people will rush to buy it and this will increase its price. Media reporting that whales buy many units of a token or sell a mass of them could also trigger a price change. The same happens when the media gives a negative account of a token.
It is also necessary to consider the possibility of reporting its management. When former Binance CEO Changpeng Zhao was arrested last year, for example, his native BNB token suffered a price drop. Interest from popular figures can also increase the value of a token, as seen in the example of Dogecoin and how its profile (and price) increased after Elon Musk took an interest in the meme coin. So far, it is clear that media reports can make or break a crypto token.
Regulatory developments
The cryptocurrency sector is relatively new and this means that it will inevitably clash with regulators around the world. And the effects of these regulatory clashes are reflected in the price of tokens. When Ripple Labs, for example, scored a victory in its lawsuit with the SEC, its native XRP token saw a surge in prices. As the market saw it, the court ruling was an indication of the quality of the project, so they rushed to buy the token.
When the SEC approved the Bitcoin spot ETF earlier this year, it triggered a massive price spike for the token and, ultimately, Bitcoin reached a new all-time high. The past few years have seen many other regulatory successes for the industry around the world, such as the passing of pro-cryptocurrency laws, the acceptance of cryptocurrencies as legal tender in some countries, and much more. Usually, a specific token or markets in general see a boost.
Effects are also felt when negative regulatory development occurs. Whenever the SEC has announced that it is suing a cryptocurrency company or is investigating a cryptocurrency venture, the market tends to reflect this. For better or worse, regulatory developments have an effect on the crypto scene.
Associated benefits
Many cryptocurrencies offer value to customers not only in themselves, but also through the benefits associated with them. For example, the Metaverse and GameFi projects often have native tokens attached to them, and the more popular these projects become, the more valuable the tokens attached to them become.
This also applies to tokens whose underlying blockchains are widely used. Ethereum, for example, is used prominently in DeFi, NFTs, GameFi, and much more. The more the blockchain is used for various purposes, the greater the demand for its native token Ether, which will increase its demand.
Utility tokens also enjoy price spikes resulting from the associated benefits. There was a peak, for example, in fan tokens for sports clubs. These tokens are often used to unlock various benefits such as VIP sections, early access to tickets, athlete meet-and-greets, and much more. These tokens are now a highly prized commodity among sports fans, and the value of the associated benefits is reflected in their market price.
The more the crypto space evolves, the more creative uses people will come up with for tokens, whether they are used to facilitate fractional investments or to give access to exclusive experiences. This means that the tokens will continue to see an increase in market value.
Pump-and-Dump and other scams
Unfortunately, not all cryptocurrency price movements are organic or driven by genuine market forces. As an investor, it is important that you are aware of the concept of pump-and-dump. This is a situation where the creators of a token artificially increase its price to deceive investors and steal their money.
It works like this: the token is released onto the market and the creators purchase a large amount of it at once to drive up the price. Investors, unaware of this trick, then purchase the token at an inflated price hoping to profit from its development. Once the creators resell their tokens at this higher price, they abandon investors with the worthless token.
Since the token’s growth was inorganic and had no actual value, the price then collapsed. This is similar to other crypto scams such as Shithcoins which trick people into purchasing a token (usually at an inflated price) which leads to both an increase and decrease in price.
This is why, as an investor, it is important to research each token you are considering and find out whether its price is organic or manipulated.
Conclusion
Cryptocurrency prices are an endless source of fascination for those inside and outside the industry. It is important to understand the mechanisms that influence token prices to know what to look out for and how to spot both genuine and inorganic price changes.