- Know how the value of cryptocurrencies is determined.
- The decentralized nature of cryptocurrencies is what makes them popular.
- Get to know certain factors affecting crypto prices.
One may wonder why crypto prices are so volatile. The value of many cryptocurrencies, such as Bitcoin, can change by many percent on any given day. Furthermore, some crypto prices of small, unknown altcoins can have an even bigger swing, which could lead to an increase or decrease on any given day.
In recent years, we have seen many price fluctuations in cryptocurrencies, and their nature is more volatile than any other exchange platform; therefore, it makes one wonder why and how the prices of cryptocurrencies are determined. To understand this phenomenon, we have to look at various factors due to which crypto prices are set and why they are different from other forms of currency.
Crypto Prices vs. Fiat Currency
Unlike any government-sanctioned currency, cryptocurrency is completely decentralized, which makes it less trustworthy. But since they are decentralized, they acquire their value from many different sources, such as:
Supply and Demand
The value of cryptocurrency prices is set by the demand and supply of cryptocurrency. If the need for a certain cryptocurrency is greater than the supply, its price is likely to increase, and vice versa. The supply of cryptocurrency isn’t fixed, as the monetary policy of each currency is different. For example, the supply of Bitcoin is limited to 21 Million, and with every block added to the blockchain, its supply increases, which affects the price of Bitcoin.
Crypto Exchanges
Some popular cryptocurrencies, such as Bitcoin and Ethereum, are traded in high volumes and are available on every crypto exchange platform. Meanwhile, small crypto coins that are not well known might not be available on every platform, and even if they are, they usually have higher trading fees. This makes investing in them costly and affects their crypto prices.
Cost of Production
Each cryptocurrency is obtained through a process called mining, and this affects its price. The decentralized networks of miners compete with each other to solve complex mathematical problems in exchange for rewards. Solving and verifying these problems on the blockchain requires strong computing power and electricity. Therefore, the more demand there is for currency, the more difficult it gets to mine. Furthermore, miners have to check if the reward they are getting is higher than they have invested and whether the ROI is higher, which creates a negative or positive sentiment. If it isn’t, they won’t mine a certain currency, affecting its crypto prices.
Conclusion
Crypto pieces are definitely valuable and matter, but there are many major factors affecting them, among them supply and demand. Cryptocurrencies may experience many fluctuations in their crypto prices due to these factors. Therefore, you need to have a strong knowledge of the crypto market and create a plan on the basis of that knowledge. Using this plan, you can smartly invest in a rising cryptocurrency and get great returns on your investment.
