Introduction
Cryptocurrencies behave in a peculiar way, different from other asset classes available to investors. These digital assets are the newest kids on the block and are set aside for the seemingly odd factors that determine their prices.
These factors are responsible for the intense volatility faced by digital assets and often overlap to create unique characteristics. It will not be out of place to see digital asset prices climbing by up to 10% in one day and losing 15% on the next day.
Assets like Shiba Inu (SHIB) and Solana (SOL) have gained up to 1,000% in months at the heights of their rallies while others like Squid Game (SQUID) have plummeted sharply within hours to the dismay of investors. This article will unravel the factors that determine the prices of digital assets in a clear, concise manner.
But before we jump right in, it is important to highlight the importance of a coin price tracker to keep tabs on assets in your portfolio. CoinStats is one such tracker that allows users to track the performance of their assets with ease.
Let’s jump right in to explore some of the factors that determine the price of cryptocurrencies.
1. Community
The community around a cryptocurrency project plays an integral role in the pricing of an asset. Vibrant communities often indicate that a cryptocurrency project is viable and is taken as a positive sign by investors to buy into a project.
Bitcoin (BTC) is a digital asset with some of the most loyal community members, going as far as earning the connotation, “bitcoin maximalists.” The term refers to the enthusiasts of the digital asset exhibiting a high level of support that has the effect of drawing in new investors to the fold. A strong community influences the price as community members buy and hold the asset while projects without a vibrant community may find it difficult to get the buzz going.
2. Partnerships and Developments
Reports of partnerships for a project play a part in determining the price of its virtual currency. The more lucrative the partnership is, the stronger the rally that follows the announcement. Dogecoin’s partnership with Elon Musk’s Tesla saw the asset record impressive gains in the last quarter of 2021 while a string of Cardano partnerships helped ADA to see new all-time highs.
Technological developments like upgrades or hard forks to a blockchain network have been shown to positively affect the price of assets. Solana’s (SOL) improvement on faster block times and improved scalability was responsible for the digital currency breaking into the top ten cryptocurrencies by market capitalization.
Ethereum’s debut with smart contracts and Cardano’s unveiling of the technology led to a spike in network activity. Furthermore, hard forks like the London hard fork have contributed their quota to ETH’s value while the incoming Merge is touted to send prices to the moon.
However, reports of botched upgrades or multiple delays to the launch of an upgrade are a bad omen and can have dire consequences for prices.
3. Demand and Supply
At the core of the factors influencing digital asset prices are the rules governing demand and supply. The relationship between the two factors is easy to understand for beginners in the industry. Simply put, increased demand equals higher prices and a dip in demand leads to falling values.
There are several ways projects can increase the demand for their assets. The most common way is to control the supply of tokens, thereby giving the illusion of scarcity. Networks like Ethereum and Shiba Inu make use of burning as a deflationary tactic to reduce the number of tokens in circulation. This creates short-term demand that leads to an increase in the price of the asset.
Bitcoin does not need a burn mechanism, instead, the network makes use of a hard cap of 21 million BTC and a halving mechanism every four years to regulate token circulation.
4. Regulatory Activity
Regulators can affect the price of cryptocurrencies with their actions toward the digital assets industry. Positive regulation of the industry in leading jurisdictions is often the catalyst for a higher valuation of digital assets.
Enthusiasts will fondly remember the U.S. Securities and Exchange Commission’s (SEC) decision to approve a Bitcoin exchange-traded fund (ETF) was instrumental in BTC’s charge to reach a high of $68,789.
On the flip side, negative decisions like investigations or a crackdown have the negative effect of casting a dark shadow on cryptocurrency prices. For example, the SEC’s refusal to approve a pureplay Bitcoin ETF and China’s infamous crackdown on all crypto activity in the country. China’s move adversely affected mining hashrates and threatened to end the stellar run that the asset was already on.
5. Miner Activity
There is an intricate relationship between cryptocurrency prices and mining activities. Generally, when the mining of a digital asset is expensive, the price tends to go up. This is because miners saddled with the responsibility of securing the network have to break even and fork out a profit to remain incentivized to secure the network.
Mining BTC or ETH is a cost-intensive process involving the use of expensive hardware running into thousands of dollars. Miners have to grapple with the challenge of rising energy costs and fees for licenses to operate in certain jurisdictions.
Digital assets that do not require expensive mining processes may not rank high in terms of value compared to those that make use of expensive mining equipment.
Conclusion
The factors that affect the prices of cryptocurrencies are a handful and they work in concert to create a unique characteristic for the asset class. These factors affect the volatility faced by asset prices and an understanding of how they operate is a worthy addition to your trading repertoire.
Miners and the activities of regulators, the age-old factors of supply and demand, the community behind the token, partnerships, and technological development are some of the factors that affect the prices of digital assets.