If you are just about to take the first steps in cryptocurrency investments, then most likely the topic above is relevant for you. However, even experienced investors sometimes forget the simple truths and need to refresh memory about basics. Therefore, we decided to compile a short guide to answer this popular question.
Cryptocurrency Vs. Fiat Currency
Probably, you are familiar with how do the fiat currency prices are formed. The main difference between cryptocurrency and fiat money is that the last one is backed and controlled by the central government. Therefore, the supply of fiat money is unlimited. On the other hand, cryptocurrency is decentralized: the supply of coins is limited and no one can control their rate, even the cryptocurrency developer. However, several factors can affect the price of a cryptocurrency:
Supply and demand of the coin
The basic economic principle is also relevant to the cryptocurrency market. Cryptocurrency value drops when a cryptocurrency has a high token supply with little demand from traders and users. Contrariwise, if the demand is high, then the value of the coin will increase. Typically, straight after the coins are distributed almost everyone who is interested in the project already has their coins and there aren’t many newcomers who would like to buy these tokens. It causes a situation with high supply plus low demand which results in low prices.
The overall state of the cryptocurrency market reflects on the altcoins’ prices. Typically, altcoins are exchanged with BTC or ETH so their value is tied to the price of what it is exchanged for. Mostly, the whole crypto market responds to BTC and ETH price changes. Besides, the volume of trading also has an impact on cryptocurrency prices: the low market activity also reflects in the price drop.
The media and public attitudes also have a big influence on the price of cryptocurrencies. Rumors, negative talks, and victimizing publications can make coin take a dip. FUD is still a big problem and a manipulation tool on the crypto market because prices are heavily influenced by human emotion and hype.
Despite having no control over the coin price, a cryptocurrency developer can have an impact on it. Another factor that affects the price of cryptocurrency is the value of the underlying blockchain platform — how useful the project is, how many adopters and users it attracts, and so on.
Even though cryptocurrency is much more independent than fiat money, coin developers and owners can work upon its price. Developers are able to make their project more valuable, popular, and heartily welcomed by media. And coin adopters can maintain its demand by buying and HODLing it for future gains.