Initially, there was only one cryptocurrency- the mysterious and interesting virtual coin, Bitcoin- launched in the digital realm in 2009. But after some years, thousands of other digital assets joined the crypto market and brought with them their own promises and purposes. People began to be increasingly interested in cryptocurrencies and the innovation they brought, which is why many of them wondered whether they should buy Bitcoin or how to buy ETH. Cryptocurrencies grew fast in popularity, and they were no longer just a means of exchange but an investment opportunity for the people willing to navigate the volatile world of digital assets.
But cryptocurrencies are known for their volatile nature, as they commonly have price fluctuations. A volatile crypto market can be both an advantage and a downside for investors. The benefit is that it can allow investors to make significant profits if they can predict the next movements in the market. But, at the same time, it exposes investors to major risks because the value of their investments can change unexpectedly and rapidly.
What is a crypto market?
Cryptocurrencies can be used for many purposes, like trading or developing dApps. Also, cryptocurrencies can be investment options, and the digital place that makes this possible is the crypto market.
The crypto market contains all the virtual currencies that are present nowadays. Cryptocurrencies are decentralized, which means that they are not controlled by any financial institution or government. There are various reasons that affect the crypto market and the price of cryptocurrencies at the same time.
What are the factors that influence the crypto market?
Crypto assets are known for their volatility, and so is the crypto market. The prices of digital assets can change significantly over a short period, and they can be influenced by a variety of factors. Here are the most common ones.
Supply and demand
One of the reasons that changes the value of cryptocurrencies is the demand and supply. This is why the price will also increase when the demand increases faster than the supply. Some cryptocurrencies have a fixed supply, like Bitcoin, which has a capacity of 21 million Bitcoins. There are also some digital coins that have no supply cap, like Ethereum. Demand also increases when a cryptocurrency gains awareness by the large public.
And the higher the demand is, the higher the price will be. Additionally, institutional interest can boost demand and increase the price. For example, this happened when Elon Musk, the founder of Tesla, announced the purchase of $1.5 billion of Bitcoin in the past.
Production costs
New digital assets are produced with the help of a mining process. Miners need to solve challenging math problems to verify a block. So, the cost can increase if there is more competition to mine at a certain time. The first one who solves the problems will be the one who will gain more cryptocurrencies, which is why miners need to invest in powerful equipment. Miners will not mine if the value of the digital currency is not enough to bear the cost. So, the price is more likely to increase when there is a high blockchain demand.
Economic conditions
Economic conditions, such as interest rates, inflation, and unemployment, can affect the price of cryptocurrencies. For instance, if inflation is high, people will likely not invest in digital assets.
Government regulations
Government regulations can also impact the crypto market. The government’s strict regulations can discourage people from buying cryptocurrencies, as the market can decline. For example, when India banned the use of banking channels in 2018, the prices went down by 10% in only a day. Similarly, China’s ban on Bitcoin trading in 2021 caused prices to crash significantly, from about $51,000 to about $41,000 at the end of the month.
Competition
There are plenty of cryptocurrencies on the market currently, and more are being constantly launched. The truth is that it is not very hard to launch digital assets. What is indeed harder is to make them viable so that they will withstand the market changes. But over the years, plenty of digital assets have become very considered by investors. Ethereum and Bitcoin are the largest cryptocurrencies by market cap, but that doesn’t mean they have no competitors. They have the “first-to-market” advantage, but many other digital assets are becoming more considered by investors.
If a competitor in the crypto market gains momentum, then the value of the other existing currencies will decrease. Competition can impact the prices, as several people might want to try the new alternatives that appear in the market.
Media
The news can also impact the prices of cryptocurrencies. If there is information that widespread fear due to changed market conditions or a negative event, then the prices tend to fall. This also goes for vice versa; if there is good news, investors will be more likely to buy digital currencies.
Media can also impact the competition price. For example, the successful Ethereum Merge caused price fluctuation for Bitcoin and other altcoins.
Final words
Investing in cryptocurrencies is a personal decision and depends on many factors, like investment goals, risk tolerance and financial situation. Investing in cryptocurrencies is risky, as digital assets are characterized by extreme volatility, and the prices can fluctuate unpredictably and rapidly.
This is why, before investing in digital coins, it is very important to assess both the risks and potential rewards of the investment. This can only be made through market research to understand the situation better. The more information you know about cryptocurrencies, the better it will be for you. This is because you will navigate the crypto sector more securely and will not let emotions make decisions.
