Cryptocurrencies came into existence in 2009, with the launch of Bitcoin. For many years, these currencies were primarily used for black market transactions as they offered high levels of anonymity. However, they have now become extremely popular investment options. Anyone who has thought of investing in cryptocurrencies understands how this market can be extremely volatile. But what exactly influences the price of cryptocurrencies? And how can you determine whether the prices will go up or down? Let’s find out in this guide.
Supply and Demand
One of the key factors that influence the price of cryptocurrencies is their supply and demand. At any given time, you will be able to determine the supply of a particular cryptocurrency, and if this supply gets too high, the price will likely go down. However, you also have to consider the demand for the cryptocurrencies, and this can be affected by lots of factors.
The most important factors that can determine the currency demand are its awareness and level of utility. As an example, the demand for Ethereum has increased because of the increased adoption of decentralized finance projects. It is worth noting that some currencies have a maximum supply, and others simply burn existing currencies to limit their supply. This way, the projects are able to prevent the slowing down of inflation.
The Mining Costs
New cryptocurrencies are produced through a process known as mining, and this task requires very high amounts of computing power. As more people try to mine these currencies, the computing power required will increase significantly. This cost will have to be factored into the price of the currencies. Since miners are essential to the functioning of the blockchain, the price of the cryptocurrencies will go up as long as there is a demand for the currencies.
Central Bank Interest Rates
Central banks such as the Federal Reserve and the Bank of England have a major impact on the cryptocurrency market. They regularly set interest rates for major commercial banks, and this can have a major impact on various investments, including cryptocurrencies. This is actually one of the key factors that have led to a steep decline in the price of cryptocurrencies in 2022. Since the Fed has indicated that it may increase interest rates in its next meeting, more people are dumping their cryptocurrencies for more defensive investments. This is because higher interest rates signal that the economy will slow down as businesses will be willing to take lower credit.
Ease of Purchase
If a cryptocurrency is easier to purchase, more people will be willing to invest in it. The main factor that determines the ease of access is the number of cryptocurrency exchanges that support the currency. Some exchanges will allow you to swap cryptocurrency pairs, and this can make it more expensive to purchase the currencies.
Decisions Made By Major Governments
Some governments have embraced cryptocurrencies while others have outright banned these currencies. Decisions made by countries like the USA and China have made decisions that have had major impacts on the prices of these currencies.
Cryptocurrencies are some of the most volatile investments. As an investor, it is essential to understand the factors that impact the prices of cryptocurrencies. Some of the most important factors include the supply and demand of the currencies, the mining costs, the central bank interest rates, the ease of purchase, and the decisions made by major governments. You should also note that inflation will affect the prices of these currencies. By evaluating these factors, you will be able to determine whether the prices of cryptocurrencies will rise or fall.