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Understanding cryptocurrency prices

The cryptocurrency market is extremely volatile. Unlike equities, a digital asset can go up or down over 10% in one day, without it being considered out of the ordinary. Most of the time, Bitcoin influences the entire market and sets the trend for the rest of assets to follow. Trading on exchanges is available at all hours, on every day of the year; the crypto market does not close as the stock market does in the evenings and on weekends.

Besides the prices of digital assets, investors need to pay attention to the market capitalisation of these assets. The value of an asset depends on its price but also on how many units are in circulation. The price of an asset multiplied by the number of units gives the theoretical market cap of the asset at a given time, which is a function of the interest shown by investors.

Generally speaking, this market volatility with the accompanying changes in cryptocurrency prices translate into an immense fluidity in the valuations of digital coins, which have witnessed sharp rises and falls in recent years – the $1 trillion cap barrier was broken in early 2021, grew to $3 trillion in autumn 2021 before the market rolled over and settled around $2 trillion in 2022.

When investing in crypto, it is important to remember that it is a nascent sector and its market is still far from maturity. Nevertheless, the large influx of new investors, particularly institutional investors, is going to bring more stability to the market and make it less susceptible to this type of volatility. And while it was easy to move crypto prices with relatively little capital, it is becoming ever-more difficult for speculators to cause meaningful waves in the market.

One final important aspect to consider is the daily trading volume. When a cryptocurrency is traded a lot during a period, we can say it is liquid. The more liquid a cryptocurrency is, the higher its credibility and worth. It also allows investors to buy or sell that crypto at their preferred price.

Nowadays, the daily trading volume in the cryptocurrency market is counted in the hundreds of billions of dollars, even during days of low trading. This is again far below traditional currency markets where trillions of dollars are traded daily, but the constant increase in crypto trading volumes demonstrates that the sector is pulling in more and more people.

Crypto prices: what influences them?

The price of a cryptocurrency is basically determined by supply and demand. If the number of people wanting to buy an asset is greater than the number selling, the price rises. If there are more sellers, the price drops. Several factors can play on the behaviour of buyers and sellers, and thus the movement in prices.

Over the short term, good and bad news will have some effect as well as technical analyses, which attempt to determine how a digital currency will perform and what its price should be through the use of charts and a slew of indicators. When lockdowns were announced, for example, the cryptocurrency market collapsed in a matter of days before regaining its footing a little while later. Moreover, the weight of Bitcoin and Ethereum on the market cannot be ignored. When these two cryptos see a swift rise or drop, this ripples throughout the entire market.

Over the long term, only the mass adoption of a cryptocurrency by the public and institutional investors would be capable of establishing that digital asset firmly in the market. From this, we can see that such a crypto needs to be an integral part of useful projects bringing value to the entire ecosystem before it can really have a future. Furthermore, new and future regulations, both domestically and internationally, could have a material effect on the level of adoption, not to mention any loss of trust in traditional systems which would push a large number of investors to seek a safe haven in cryptocurrencies.

One other major aspect to consider is the different ways cryptocurrencies operate. For example, Bitcoin was developed with a limited supply set at 21 million coins. By December 2021, over 90% of all bitcoins had been mined. As the number of new bitcoins available contract, its inherent rarity will naturally provoke a rise in its price.

However, not all cryptos have such a limited supply. For Ether, there is no maximum quantity. Since this cryptocurrency will not become rarer over time, its value is based more on how big of a role it will take on in the world, in other words, how important its decentralised finance, smart contracts or blockchain applications will become.

That’s far from all! The price of a cryptocurrency can also be influenced by how difficult it is to mine and, as a corollary, how much energy it consumes. The more energy needed to keep its blockchain secure, the more mining costs increase, meaning its selling price goes up. Conversely, this cost of energy could deter environmentally conscious investors, especially when there is bad press or articles denouncing the carbon footprint of cryptos, triggering a certain disillusionment with the assets.

Keeping with the media, we cannot underestimate the potential effect of scams, theft and hacks on how the public perceives digital currencies. Fortunately, there are ways to protect oneself from fraudulent practices. The simplest is to avoid recently launched or unknown cryptos and use trusted platforms that implement a high level of security for the buying and managing of cryptocurrencies.