What Are The Factors That Drive Cryptocurrency Pricing?
Originally posted by Team Kalkine @ kalkinemedia.com
A Cryptocurrency such as Bitcoin, Litecoin, Ethereum, etc. is a digital asset designed to provide means for a financial transaction without any dependence on a centralized body and is generally secured by cryptography (a technique involving programming to secure transaction). The cryptocurrency uses blockchain technology (based on an openly distributed ledger that can record transactions) to maintain financial transactions as there is no centralized party involved in it. The cryptocurrency market has attracted many people and is continuously gaining popularity irrespective of the absence of proper regulatory norms and high level of risk that is involved. The key aspect to note is that the volatile trends keep on impacting the prices which are currently at a level much below the prices prevailing early last year before the steep slump.
Factors that influence Cryptocurrency prices:
As cryptocurrencies are considered to be digital assets, various fundamental factors such as supply and demand, macro factors, some key news, etc. affect the prices.
Supply and Demand Scenario: The basic fundamental concept of supply and demand is also applicable to cryptocurrencies. When the level of currency in circulation is low, higher prices will be associated with it but this also depends on acceptance level. The idea of supply and demand can be inferred by the different prices of various cryptocurrencies currently under circulation. Bitcoin was seen to be priced at US$6,400 with a supply of about 17 million bitcoin in circulation, whereas the value of Ripple (XRP) is around US$0.28 with a supply of 39 million in circulation. As in any commodity, the supply and demand scenario determines the price so does in cryptocurrencies.
Macro event or News: The media is the most effective way of creating panic or greed when it comes to any financial asset, and it also affects the cryptocurrency prices. The impact created by news (sometimes related to macro event) can be of short or long duration depending upon the geopolitical environment.
Action of large fund houses: The action caused by big fund houses on any commodity sometimes becomes inevitable as these fund houses create fear of missed opportunity, uncertainty and doubt. Likewise, the perspective of big fund houses on cryptocurrencies also influences its price. Whenever a large fund house or financial house sees blockchain technology as a future of transaction or as means for destruction or threat to the centralized financial system, it hampers the prices.
Liquidity: Liquidity or how quickly one can convert an asset into cash also influences the price of commodities and does influence the price of cryptocurrencies. The higher the liquidity in the cryptocurrency market the higher the price as investors pay an extra premium in terms of higher valuation for higher liquidity. However, liquidity in the cryptocurrency market comes with the acceptance of cryptocurrency as a mean of a transaction. So, more the parties accept it as a means for payment the more will be its price.
Political Factors: As cryptocurrency is currently seen as a means to have transactions without a stringent financial control from centralized bodies, legal action taken by various centralized bodies and government easily impacts the prices. For example, South Korea’s ban on Crypto-Exchange led to a drastic fall in the cryptocurrency market. Some countries accept cryptocurrency as a legal tender, but many don’t. The acceptance of it as a legal tender supports its price and non-acceptance exerts pressure on the price. Various government and central body have banned cryptocurrencies as well, which has hampered the prices in the past.
As of now, the framework for cryptocurrencies is still being developed and market expects to see many changes going forward.
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