As a new asset class, virtual assets are undergoing price discovery with traders and investors discovering every day new ways in which the prices of assets are affected (or more accurately manipulated.) Price manipulation is not a novel activity with the cryptocurrency market but with such a nascent market, the effects of price manipulation are very real. In this brief guide, we will introduce you to some of the factors that affect prices of cryptocurrency assets. These include:
- Asset economics – supply and demand
- Asset utility – the usefulness of the asset
- Market sentiment; and
- Asset fundamentals – we will focus on how mining difficulty, in particular, affects pricing
This list is by no means exhaustive but these are some of the main factors that control price action for most cryptocurrency assets. So let’s look at each one of them.
There are two things that affect the economics of an asset be it a traditional or virtual asset and these are supply and demand. The price of bitcoin, which is the flagship digital asset also obeys the law of economics which simply just says that the price of an asset will rise will increase demand and reducing supply while the reverse is just as true. Bitcoin has a circulating supply of over 18 million coins out of the possible 21 million. The supply is limited and the rate at which these coins are released into circulation is also controlled. In 2017, the price of bitcoin rallied to all-time highs of close to $20,000 due to a large part of the effects of the law of economics. At the time, the market sentiment was so high that it pushed people to want to buy the coin hiking the demand levels for the coin but the supply metrics did not keep up so the price shot straight up.
The usefulness of an asset also affects the price of an asset. In this case, Ethereum is a classic example, whose utility or perceived usefulness made the price of the asset to skyrocket since its inception back in 2015. Ethereum is a platform on top of which smart contracts and decentralized applications (dApps) are run. Following the launch of Ethereum, dApps became so popular that the price of Ethereum’s native asset has been rising ever since. This factor ties in with the law of economics.
You have probably heard of Crypto Twitter – and yes it is a thing! The market perception is so strong with cryptocurrency that if an influencer sends a positive tweet about an asset, it is able to positively affect the price of that asset. This is partly possible because most of the trades on cryptocurrency are carried out by trading algorithms whose trading signals are based on market sentiment and influencers are a real price action trigger for virtual assets.
Asset fundamentals are such as broad topic but in this section, we will confine ourselves to coin generation or mining. Mining can be associated with the price of an asset if you look at it through the lens of the law of economics and in particular the supply aspect. If the rate at which a coin is produced is increased, the supply increases and consequently this will negatively affect the price of an asset while the reverse is also true.
There are way more factors that affect the price of an asset and if you are going to engage in crypto trading, it is paramount that you familiarize yourself with most if not all of them.
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