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What determines the cryptocurrency rate

21 ноября 2022

Cryptocurrency Pairs

We are accustomed that the value of world currencies is not constant and fluctuates every minute. The market of digital assets is no exception. All cryptocurrencies trade against the dollar, for example, the pair BTC/USD or ETH/USD, but you can also meet cross-pairs: BTC/ETH, BTC/ETC.  

For convenience, cryptocurrencies are most often traded not against the fiat dollar, but against USDT steablecoin, the value of which is tied to the value of the US currency.

What determines the cryptocurrency rate What determines the cryptocurrency rate

Fundamental Factors of Impact

The exchange rate is shaped by two fundamental components: supply and demand.  

Demand

If it is publicly announced that a new low-liquid cryptocurrency will be accepted in all countries, there is a demand for it, many investors want to buy and store it, as it is fashionable and profitable. The increase in demand causes the price of coin to rise relative to the underlying asset. As demand declines, the price of the coin starts to fall, as sellers will agree on a smaller amount to get rid of unpopular currency.  

Proposition

The second fundamental factor influencing the course is supply. If the supply of an asset in the market declines, because of the burning of some tokens or withdrawing to cold wallets, you can expect the exchange rate to rise as the number of buyers does not change and the number of coins in circulation decreases. Conversely, the exchange has announced a tenfold increase in the volume of currency trading, then the price will fall, for the same reasons.  

Mining benefit

But course formation is not straightforward. The price of cryptocurrency is affected by the cost of its production, this is the price of equipment for mining and the tariff for electricity.  

Impact of stock assets on cryptocurrencies

Recently, the crypto market has been heavily influenced by the stock market. This is because digital assets hold investment funds in their accounts. Funds have rules of engagement that require them to sell or buy an asset at a specific event. If this event occurs, the funds start selling all high-risk assets: stocks, bonds, or cryptocurrencies. Therefore, when the stock markets fall, cryptocurrencies also fall. Digital assets are the first to fall and the first to start growth when the trend changes.

How Geopolitics Affects Cryptocurrencies

Digital money is affected by geopolitical events. A few years ago, the ban on mining in China hit the market, as half of the miners were in Asia. The restriction of cryptocurrencies in a country with a large and wealthy population can cause the outflow of citizens' funds from cryptocurrency exchanges and cause an avalanche-like fall of the entire market.

The role of social networks in the world of cryptocurrencies

Lately, the influence on currency rates is gaining popularity via media. Via posts in Twitter or Telegram. Elon Musk contributed to the growth of the Dogecoin meme token through his social network posts.

Which does not affect the course

Digital assets have a feature, the cryptocurrency is not tied to the cost of raw materials, to oil or gold (except steablecoins). Therefore, fluctuations in commodity markets do not affect coin prices. However, with the economy stagnating and the demand for raw materials falling, it can be concluded that the population is getting poorer and industry stops. Cryptocurrency does not exist in a vacuum, and a decline in investor activity would lead to a correction of digital assets.

So how do we predict course behavior?

The exchange rate of cryptocurrency consists of many independent variables and it is not easy to influence it. As cryptocurrency capitalization grows, it becomes more difficult to manipulate value, as at the dawn of electronic money. In the past, a group of investors could by their actions crash the course or «refuel the missile».  

The introduction of rules for market participants has stabilized the exchange rates of major cryptocurrencies, and this is a positive signal for the world economy.

There are no reliable methods of predicting the behavior of cryptocurrencies, so when trading cryptocurrencies follow classic rules, buy only reliable assets, in periods of low prices, form a position in parts, Limit margin trading and expect long-term investment.  

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