If you know anything about cryptocurrency, even if you’re not an active trader, you probably already know how unpredictable the crypto market can be.
Prices can soar or plummet without warning, and over the years, traders, creators, and researchers have all attempted to further understand what can influence the value of crypto.
After all, cryptocurrency is much different from fiat currencies, and its value is not derived from or controlled by governments and financial institutions.
The good news is that, despite this volatility, we are still currently aware of various factors that affect cryptocurrency’s value, including each coin’s supply and demand, production cost, real-world use cases, availability, competition, regulations, popularity, and media coverage.
In this article, we will look into these factors and discuss how and why they can influence the value of various cryptocurrencies.
Which Factors Affect the Value of Cryptocurrency?
It’s important to understand the factors that can affect the value of cryptocurrencies so you can make better investment decisions!
So, let’s take a look at some of the key factors that determine the value of crypto:
Supply and Demand
Supply and demand is one of the most vital factors that influence the value of cryptocurrency.
This concept refers to the number of buyers and sellers of a particular coin.
If there are more buyers than sellers, the price of a coin will increase, whereas if there are more sellers than buyers, the coin’s price will decrease.
To capitalize on supply and demand, many crypto traders have adopted a strategy where they buy cryptocurrencies when there is more demand than supply and sell when there is more supply than demand.
Additionally, since some cryptocurrencies, such as Bitcoin, have a finite number of coins that can ever be created, as time goes on, demand will overtake supply and drive up the coin’s value.
Alternatively, some cryptocurrencies, such as Ethereum, have no supply cap, whilst others have mechanisms that ‘burn’ tokens to slow inflation, and in some cases, such as with Logarthmics Finance (LOG) to drive up the value of the token by slowing decreasing its supply.
Production Cost
All cryptocurrencies are produced through a process known as mining, whereby miners use computers to verify the next block on the blockchain.
Crypto mining requires specialized hardware, servers, and other resources, and in return, miners are rewarded with a network fee and crypto tokens.
Mining is costly and painstaking, which is why there is a limited number of active miners. If the cost of mining rises and more powerful equipment is needed, the value of a coin may also increase.
However, miners won’t mine a cryptocurrency if its value is not high enough to offset the costs of mining.
Towards the end of 2022, Bitcoin miners met with tons of pressure after the cost of mining a single Bitcoin began to cost significantly higher than the coin’s USD value.
Luckily, since then, the value of Bitcoin has risen and is now higher than the cost it takes to mine.
Real-world Use Cases
Typically, coins with specific utility and real-world use cases will have a higher value than those that do not.
This is one reason why, apart from special instances (such as Elon Musk’s Dogecoin tweets), memecoins are typically less valuable than utility tokens, stablecoins, governance tokens, and security tokens, as they don’t serve any purpose.
The more uses a cryptocurrency has; the more incentive traders have to invest in it.
For example, the well-known cryptocurrency, Ethereum (ETH), supports smart contracts and allows traders to create their own decentralized applications (dApps).
With multiple use cases that allow Ethereum to become the backbone of many blockchain-based projects, this coin cemented its place as the second-most valuable cryptocurrency after Bitcoin.
Alternately, stablecoins such as Tether (USDT) are designed to reduce price fluctuations as their value is tied to that of another currency or commodity.
Availability
Coins that are widely available are also more likely to increase in value compared to coins that are not.
Although popular exchanges such as Kucoin support a wide range of cryptocurrencies, there are still various coins that they may not support.
This lack of availability can cause certain coins to drop in value, as traders want to avoid going through the hassle of signing up for two or more exchanges and paying a fee to swap various coins.
To make this process easier, traders may use a brokerage to perform all actions related to crypto trading.
A brokerage acts as the middle-man between traders and the cryptocurrency market, making them most suitable for beginners who require help building up a diversified portfolio.
With so many different brokerages, both good and bad, available, we recommended signing up for a crypto platform (e.g. Bitcoin Thunderbolt) to be automatically connected to one that can best aid you as you start trading crypto.
Although using a brokerage cannot necessarily help you predict the value of crypto, they still offer a range of benefits, including easier currency conversion, increased security, and other user-friendly tools.
Competition
As of 2023, there is an estimated 22,000 different cryptocurrencies, with at least 12,000 currently being active and tradable.
Due to the sheer amount of choice that crypto traders have, crypto projects have the daunting challenge of overcoming rival coins. As a coin gains traction and its prices rise, the prices of all its competitors will subsequently reduce in value.
This is why, although it is fairly easy for developers to launch a new coin, it is much harder to actually build value for the coin.
What’s more, this competition is only going to get tougher as more coins are regularly introduced.
In the early days of Bitcoin, the first-ever cryptocurrency had little-to-no competition, allowing the price to rise steadily.
However, as other coins began to be introduced, the value of Bitcoin was impacted in several ways.
Researchers have theorized that there are two different forces that are at work in the market regarding the competition between different cryptocurrencies (with a focus on Bitcoin).
The ‘reinforcement’ effect suggests that as Bitcoin becomes more popular, traders will believe that it has won the “winner-takes-all” race against competitors, leading to a further increase in its value.
Alternatively, the ‘substitution’ effect results from speculative dynamics and suggests that as Bitcoin rises in value and becomes more popular, it will be considered overvalued and too volatile.
This would then encourage trades to look for alternative cryptocurrencies to invest in.
This interesting study is a perfect example of how a crypto coin’s value can considerably influence its competitors’ value.
Government Regulations
Some factors can influence the value of all cryptocurrencies simultaneously.
If a government annoyances new regulations on the use of crypto, it can discourage new investors from trading it and even convince traders to sell their holdings.
In turn, this leads to the prices of most coins dropping and causes the crypto market to decline.
On the other hand, if certain countries decide to adopt a coin, then this can lead to the coin’s value increasing.
For example, in June 2021, El Salvador became the first ever country to use Bitcoin as a legal tender.
It cannot be known for sure how or if this impacted the price of Bitcoin due to the 2021-2023 cryptocurrency crash.
However, we are inclined to believe that as more countries choose to adopt certain coins as legal tender, it will influence the value of these coins.
Popularity
A coin’s popularity is mainly defined and influenced by social media.
Most coins have their own dedicated communities through social media platforms such as Reddit and Discord, where members discuss the coin’s performance, project developments, and any news stories related to it.
Larger and more active communities can help persuade other traders to invest in certain cryptocurrencies as it sets a positive tone for the future of the projects.
Celebrities and influences can also significantly affect the popularity of coins through social media posts.
The most famous example is the series of tweets posted by Elon Musk throughout 2020 and 2021, where he publicly declared his support for the memecoin, Dogecoin (DOGE).
This focused more attention on the relatively unknown coin and caused a noticeable increase in price.
But this is not the only time that Musk single-handedly impacted the price of a coin.
On May 13th 2022, he tweeted that his company, Tesla, was no longer accepting Bitcoin payments due to the environmental impact of the coin’s mining process.
Following this tweet, the price of Bitcoin plummeted even further after an already steady decrease in value.
Media Coverage
Online news outlets are extremely powerful and drastically influence the value of any cryptocurrency.
If the media chooses to cover a particular coin, then traders can expect the coin’s price to fluctuate depending on if it has been covered in a positive or negative light.
It can even be suggested that some crypto teams or creators purposely cause a stir in the cryptocurrency community in an attempt to have their coin discussed through crypto news outlets.
For example, the memecoin, Shiba Inu (SHIB), made headlines after the pseudonymous founder, Ryoshi, deleted all their social media posts and publicly stepped away from the project with a dramatic final tweet in May 2022.
Notably, the coin’s price experienced a slight increase in price in the days following this drama.
Of course, Ryoshi may not have purposely caused this media coverage, but intentionally or not, this action did affect the price of Shiba Inu.
It can also be theorised that media coverage helps to build (or break) trust surrounding particular coins.
If you’re constantly reading about a certain coin through news outlets that you trust, then you may be more to consider the coin as a worthwhile investment.
Similarly, if news outlets are covering controversy about a certain coin in a negative light, then you may be less inclined to invest in it.
Overall, we suggest checking to see if any cryptocurrencies you’re interested in trading have been covered in the media, as this can give you a better idea of how the public views them.
A Final Word
To conclude, there are various factors that can impact either the value of different coins or the value of cryptocurrency as a whole.
By being aware of these factors and understanding how they can influence the price of crypto, you can better predict how a coin will perform before choosing to invest in it.
However, it is crucial to remember that not even crypto experts can accurately predict the value of any cryptocurrency.
The crypto market is notoriously volatile, and the prices of coins can fluctuate without any prior warning.
Therefore it’s important to do extensive research and consider your financial situation before risking any of your money through crypto investments.
Related: How to Buy Cryptocurrency for Beginners
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