There are a lot of opinions on the reasons why cryptocurrency prices change; you can find thousands of articles from economic researchers and crypto experts. There is no general consensus on what causes the drop or increase in the price of cryptocurrencies or what affects the crypto market cap.
Today, we are going to talk about the main reasons that cause a change in a cryptocurrency’s price.
Reason 1: Liquidity
Liquidity means having enough money or assets that can easily be turned into cash when needed by a company or market. When people trade their cryptocurrencies for fiat money, it is called liquidating. The amount of money you get for liquidating depends on the market and the exchange you use.
One thing that affects the price of liquidating is how much people buy and sell crypto each day; this is called trading volume. Different exchanges have different trading volumes for the same cryptocurrency, which can cause slight price differences.
When you look at an exchange, you can see an order book. This is where people set prices to buy or sell a cryptocurrency. Many trades happen constantly because the cryptocurrency market never closes. These trades, facilitated by crypto market makers, cause prices to go up and down.
If there isn’t a lot of liquidity, the order book won’t have many trades, which will cause the prices to change. So, when liquidity is low, prices can be unstable.
Reason 2: Media Lighting and Reputation
The price of assets can be influenced by both market factors and the media. For example, if a cryptocurrency gets a lot of attention from the public, traders might start buying it more, which makes the price go up. But if the media talks negatively about a cryptocurrency or exchange, traders may sell it quickly to avoid losing money.
Reason 3: Arbitration
Arbitrage means buying something cheap in one place and selling it for more in another place to make a profit. For example, if you notice that Bitcoin is cheaper on one website than another, you can buy it there and then sell it on the other website for a higher price.
However, it can be hard to do this because other people and computer programs can also spot these opportunities and act quickly, or the prices can change before you get the chance to sell. This can make prices stay different for longer than they should.
Reason 4: Coin Utility
Blockchain tech companies believe that cryptocurrencies must have a good reason for people to invest in them. For instance, Ethereum is a cryptocurrency that is needed to run programs and make apps on the Ethereum blockchain. ETH acts as the fuel that powers the Ethereum blockchain and Ethereum-based apps.
So, when more people use it to make transactions and apps, the price of Ethereum goes up. As a result, the value of cryptocurrencies, in general, also goes up as they become more popular.
Reason 5: Limited Resource Stock
Some cryptocurrencies have a limited number of tokens, which makes them rare. If the supply of a cryptocurrency is steady, then its value can increase over time because it is expected that more people will want to buy it.
There are also cryptocurrencies that reduce the number of coins available by burning them. The burning mechanism destroys some amount of coins. This makes crypto tokens rarer and more valuable.
Reason 6: Government Decisions
Rules made by the government can have a big effect on the crypto market. If the government bans using cryptocurrencies, people may not want to use them anymore, which could decrease crypto prices.
Reason 7: Economic Conditions
The state of the economy can impact the value of cryptocurrencies. When things like inflation, interest rates, and unemployment are high, people might turn to cryptocurrencies as a way to protect their money from losing value due to inflation.
The main reasons for changes in cryptocurrency prices are liquidity, media reputation, arbitration, coin utility, limited resource stock, government decisions, and economic conditions.
The worth of a cryptocurrency relies on how many people are interested in it and how much they use it. If lots of people want it but there isn’t enough to go around, then the price will go up. This is because people who have it don’t want to give it away, and more people want it, making it more valuable.