While many knew little to nothing about cryptocurrencies a decade ago, it is now taking the center stage, and about to usurp cash. We live in the digitalized age, coupled with the development of ground-breaking technologies such as Blockchain, AI, IoT, and many more.
With this comes the emergence of cryptocurrencies, growing at an accelerated rate, with its impact being felt on the world economy.
Investors, government institutions, financial institutions, businesses are also not left out and many are already joining the bandwagon either to develop their own digital money or invest.
However, if you are planning to invest in cryptocurrency, you need to understand what it entails and the factors influencing the pricing. Here, we have put together everything you need to know about cryptocurrency to help you make the right decision.
What is Cryptocurrency?
Just as USD, see cryptocurrency as the digital money or electronic money designed to work as a medium of exchange. Individual ownership of coin records is stored in a form of a computerized database, highly secured with strong cryptography, hence, making it difficult to counterfeit or double spend.
Cryptocurrencies are decentralized and work on the principle of blockchain technology. While there are different types of cryptocurrencies- Bitcoin, Litecoin, Ethereum, are among the most popular ones.
You can use crypto to do anything that normal currencies can do. From payment of regular goods and services to money transfer to investment, everything is going paperless and crypto is taking over.
One good thing is that cryptocurrencies have no central authority or middlemen which makes them void of manipulation or government interference.
Cryptocurrency – Factors Influencing the Price
It’s no news the price fluctuation is quite rampant and it can drastically change within a matter of hours. While cryptocurrency can be a great asset class, purchasing it can be quite a risk. That is why one needs to understand how it works, and what influences the ups and downs of the prices.
If you are always confused as to why fluctuations in pricing happen so much, here are the main factors:
Anyone who has already taken the elementary economies understands that crypto works with the law of supply and demand. The more people use it for transactions, the more the demand and the more the prices will rise.
The more investors enter the world of cryptocurrency to acquire it, and the demand for it exceeds the supply, the higher the prices of crypto will increase. When the supply overtakes the demand, the prices decrease.
Another factor that can influence the price of cryptocurrency is the rate of adoption. Early adopters who have managed to get hold of crypto can testify of how they have become rich and found opportunities to be financially buoyant.
Cryptocurrencies are gaining ground and with government, institutions, corporations, and many investors adopting crypto, this is bound to drive the price up.
How hard it is to mine the coin plays a huge role in determining the pricing. The majority of cryptocurrencies are produced through a process called mining. A lot comes into play when it comes to mining and this includes computational power, time, and by extension energy and electricity.
All this comes with a cost and can influence the pricing. Besides, the more producers(miners) entering the competition, the more difficult it becomes to mine for yourself, hence, the price increase.
Government interventions can influence the pricing of cryptocurrencies. While some countries have adopted it as a legal tender, it is outrightly banned in some countries. This means as the government figures out how to perceive and regulate cryptocurrency, this can affect its value.
For one, they can regulate the buying and selling in the market or crackdown on this asset by burdening it with regulations and controls that increase the cost of doing business. Chinese for instance, has repeatedly cracked down on cryptocurrencies and only a few years back blocked every website trading in the currencies.
As an investor, you might have known how the value of an asset can be dictated by the speculative bubble which can drive up the price or bring it down in no time. Speculative investors hoping to grab financial opportunities by buying and selling quickly can take a toll on the market and the crypto pricing.
Moreover, if a big crypto player is involved in speculative trade, it can have an adverse effect on the pricing.
Cryptocurrencies have made many headlines and have been the talk of many for years. Many reporters are always looking for opportunities to bring it down or feed their viewers with either positive or negative news. This can have a huge impact on the price of the cryptocurrency.
For instance, just like social media can help popularise cryptocurrency, it can also contribute to market fluctuations. Just a tweet or a news report about a major hacking into the system or wallets can provoke a price crash. On the other hand, a favorable report on the currencies can result in the price going up.
The good old bitcoin is still the most popular currency and the most preferred option in regards to market capitalization. The market is influenced by many of the scenarios listed above.
For instance, if the government of a country announced they aren’t sure about how to go about the regulation of bitcoin, the prices will likely go down. A good example is the reaction of China and Japan to bitcoin.
While China’s initial coin offering was banned, Japan on the other hand considered it as a legal tender and promoted the usage. These actions spanned different results. China’s actions result in a decline in price while bitcoin experiences a spike in price after Japan’s favourable announcement.