Cryptocurrency is a hot topic these days. Its meteoric rise and fall often make headlines, but not everyone understands what drives the price of cryptocurrencies.
There are many reasons why prices fluctuate so wildly, including regulatory changes and investor speculation—and that’s just scratching the surface.
Here are some of the factors that have an impact on cryptocurrency prices.
1. Cryptocurrency is still a new business
You can think of cryptocurrency as a new technology in its early stages. Cryptocurrency is still being developed, and the market and regulations are still volatile.
This means that it’s hard to predict what will happen with cryptocurrency in the future.
2. Government regulations
Government crypto regulations have a major effect on the price of cryptocurrency. For example, China’s ban on cryptocurrencies led to a sudden drop in value for bitcoin in September 2017.
Another type of government regulation that affects cryptocurrency prices is taxes. In the United States, capital gains taxes are paid whenever you sell or trade your crypto for fiat currency (USD). If you’re investing in cryptocurrency, this means you could owe money if your investment goes up in value and then gets cashed out into USD.
So how do we know which government regulations will impact cryptocurrency prices positively? It depends on how much influence they have over the market at that time. In addition, whether the government decision-making process is straightforward and transparent enough to be predictable by traders and investors alike.
3. Price manipulation
Price manipulation is a serious concern for cryptocurrency investors. Because the market sets prices, there’s no central authority to regulate or oversee the market. This means nothing stops people from manipulating the price of coins.
Here are some examples of ways investors can manipulate the price of a cryptocurrency:
- buying up large amounts of cryptocurrency and then selling it at an inflated rate to make a profit on their investment;
- buying up large amounts of cryptocurrency and using bots to create fake demand for that coin so that other people will jump on board and push up its value.
4. Cyber attacks
Cyber attacks are one of the main reasons why cryptocurrency prices are so volatile. The reason is that when an exchange gets hacked, it can cause panic among users and lead to a drop in prices.
This happened in 2014 when Mt Gox was hacked for 850,000 bitcoins worth $450 million at the time. After this hack, bitcoin prices dropped from around $700 to $400 per coin before recovering by April 2015.
The DAO attack also contributed to the decline of ether price after it was attacked by hackers in 2016. Ether (the cryptocurrency) was trading at around $20 per coin before the attack but fell to below $10 within days of being attacked.
The main reason for the volatility in cryptocurrencies is that people buy them because they expect them to grow in value. This expectation creates demand for the coins and drives up their prices. That’s why it’s common to hear stories about people who have made millions by investing in Bitcoin or other cryptocurrencies.
However, there are no guarantees that any particular coin will continue to increase in value over time. In fact, the history of cryptocurrencies has been marked by wild swings in price — both up and down — as speculators try to predict what will happen next.
6. The FOMO Factor
The Fear of Missing Out (FOMO) is a psychological phenomenon that causes people to buy something they don’t necessarily need or want. It’s been called the “principle of least resistance,” and it’s common in investing.
But cryptocurrencies are particularly susceptible to this behavior because they’re so new and exciting. When a new coin comes out, investors jump in without knowing much about it, often without even doing research. Then when prices rise, they panic and sell at a loss.
7. The news effect
Cryptocurrencies are also very sensitive to news events, both good and bad. When something happens that affects bitcoin or another cryptocurrency, it can cause major fluctuations in prices.
For example, if a government announces plans to ban bitcoin mining or restrict cryptocurrency trading, traders will panic and sell their coins before any restrictions come into effect. This creates a negative news cycle that leads to more selling as traders try to get out before the price drops further.
To survive the volatility, it’s necessary to make informed investments
We hope we have been able to provide some insight into the world of cryptocurrency and its ever-changing prices. While many factors influence the price of a cryptocurrency, it is clear that there is no one answer.
Therefore, if you’re considering investing in cryptocurrencies, do your due diligence and consult a financial advisor before making any irreversible decisions.