Before we explain what can cause a change in the value of a certain cryptocurrency, we have to discuss the nature of this currency. So how are digital currencies different from “classic” money? Well, regular currency, such as dollar, is a fiat currency per se. This means that the central authority, in this case, the government, decides upon the value of the currency and decides how much money is going to be released and when.
Also, the amount of money that can be issued by the government is unlimited. Due to this nature of modern currency, governments can easily generate inflations or deflations. So the global monetary system is centralized and has no limitations. Besides this, dollar isn’t backed up by any other value, such as gold. More precisely, dollar isn’t defined by gold anymore — in the past, it was. Now, the situation with cryptocurrency is quite different. Let’s see how exactly.
First of all, cryptocurrencies are generated by blockchain technology that is a decentralized network. So in the realm of cryptos, there is no central bank, no federal reserve, no government that makes all the decisions. Blockchain is decentralized; thus, any change that occurs is both generated and takes effect on the level of the entire network. Secondly, cryptos are defined and “checked” by hashes — so hash and blockchain technologies back up cryptos with a value that is, in this case, a code. So cryptos are determined by “something” definable. Finally, cryptos are usually scarce — for instance, there can only be 21 million bitcoins ever. This means — no inflation. Now that we understand the nature of digital coins, let’s see what can alter their value.
The List of Factors That Influence the Value of Cryptos
Many different factors can generate changes in the cryptocurrency market, mostly because they are an extremely new and revolutionary thing. People are still getting used to cryptocurrency, experts are still assessing their potential, and the world still doesn’t know what to expect. This is why each time some big trend in the global economy or politics occurs, cryptos drop or jump pretty high. We can notice today that, as time goes by, cryptos are getting relatively stabilized, in comparison to the period of two years ago, for instance. So what are the factors that influence these changes in the value of digital currencies?
1. Supply and Demand Overview
Economy has taught us that value, in general, is determined by the “supply and demand” principle. Supply and demand control, or even dictate, the value of a certain product, and generally speaking, this is the case with cryptos too. However, the case with cryptocurrency is a bit different here for many reasons. First of all, cryptos are not a product. Second of all, the supply and demand, when we talk about cryptos, is defined by other crucial factors — mostly because cryptocurrency is not just currency; it’s a decentralized network that can have multiple applications. Before we explain which factors influence the supply and demand of digital coins, let’s see the current situation with cryptos. Notice how much has changed since the extreme booms from 2017!
Now, let’s get back to supply and demand. First of all, the amount of available digital coins depends on the main purpose of that currency and other various plans and motives of the creator of the cryptocurrency. This is why there are some cryptos that are primarily intended for DApp development, but we shall talk about that later. So the first thing that influences the value of crypto is the available amount of coins — is crypto scarce or not? As we can see, the supply aspect is dictated by the creator of the currency and their main intention — do they want to use that crypto for trading, smart contracts, or application development platforms? Now, let’s see what can influence demand.
2. The Influence of Technological Progress
One of the first things that can cause altercations in the value of crypto is the number of its miners. And the number of miners is influenced by advancements in the mining technology. For instance, the number of Bitcoin miners jumped when mining GPUs got perfected.
3. The Offer Criterium — Smart Contracts and DApps
The demand for certain crypto depends on what that currency has to offer! As we have learned, cryptocurrency is not your regular currency; you can use it as a payment method, yes; but you can also use it for smart contracts or to build apps. So a currency that has more useful applications will be more demanded. For instance, the value of Ethereum has jumped because Ethereum has an amazing DApp platform that lets you use a pretty advanced code. Plus, this platform lets you build your own currency. So the bottom line is — if a new currency that offers more shows up on the market, the value of older currencies that offer less can drop. However, the arrival of a new currency itself, without any deeper reason, can influence values of numerous currencies. This happens due to the mere fascination with new crypto.
4. Global Politics
Laws can influence the value of cryptos as well. When Japan legalized Bitcoin, the value of this currency jumped. On the other hand, when China passed some crypto-unfriendly laws, the value of Bitcoin dropped but only slightly. Also, politics can influence the popularity of open-source apps and decentralized apps. Since cryptos offer a possibility of DApp development, we can assume that some political changes can influence the demand for cryptos.
5. The Education Factor
People were initially not that interested in cryptos because they didn’t know a lot about them. We can say that even today, many people don’t quite understand cryptos. So the education factor can alter the demand aspect greatly — the more people learn about cryptos, the more interested they get in investing in them.
6. The Media
Media can influence the demand for cryptos, just as is the case with any other product. Some media promote and support them; others do quite the opposite. For instance, Google banned ads for Bitcoin. After this move by Google, there was a small, but still noticeable, drop in Bitcoin value. Media has the power to promote one side in the “Are cryptos the future?” dialogue, and they also have some agenda, some interest in supporting one side or the other. This is why some media outlets can cause drops in the value of digital coins.
7. The Policy of Truth
Blockchain technology offers something that no bank, lawyer, notary, or anybody else can — the elimination of the middleman, losing money through interest, and the new meaning of trust. Everything that happens to blockchain happens on the whole network. Plus, mining, solving hashes, proves the authenticity of a digital coin. So this fusion of peer-to-peer technology and the unique “proof of work” that is built on hashing create a mutual sense of trust. This aspect of safety also causes an increase in demand for cryptocurrencies.
Although we can identify many factors that influence the changes in the value of various cryptocurrencies, we can analyze them better in the future. Why? Because the crypto market is still small. On the one hand, we are talking about billions of dollars; on the other, less than 10% of the world uses them. The amount of people on the crypto grid is so small, so when we talk about this currency, we are talking about a microcosmos. We still need to wait to talk about crypto macro cosmos. But can we determine the most crucial facts about digital coins even on this micro-level? Absolutely! Judging by the data so far, cryptos are going to gain more and more popularity as time goes by.