8 Key Factors That Influence Crypto Prices

The question “how does cryptocurrency gain value?” is constantly in the news. From staggering all-time highs, to epic overnight crashes, it seems that what affects crypto prices is an ever-changing landscape that’s impossible to predict. 

So what drives the price of cryptocurrency? And how do investors pick the right time to buy and sell their coins?

We’re going to take a good look at what affects the value of cryptocurrency and discover the real reasons why this particular commodity is so volatile. 

So without further ado, let’s get down to the tricky business of what causes the value of crypto to change. 
 

What Are Cryptocurrencies?

To understand what causes crypto to rise and fall, you first need a basic understanding of how cryptocurrencies work. 

To explain briefly, cryptocurrencies are digital coins and tokens that users can buy and trade as well as sell and spend over the internet. 

The best-known is probably Bitcoin, but nowadays there are countless coins and tokens under the crypto umbrella, and each one has its own ecosystem and individual functions. 

Cryptocurrencies are usually decentralized. This means that you can send coins from one user to another, via platforms and DApps, without the need for intermediaries, such as banks. 

These peer-to-peer transactions are all recorded on the blockchain, whereby computers all over the world verify and store these transactions. 

This elimination of the middleman also keeps transaction fees low and transfer times quick, as there is no need to go through a bank. 
 

Why Is Crypto So Volatile?

If cryptocurrencies are just digital money, why does the price go up and down so frequently? 

It can be very easy to try and compare cryptos with their fiat currency counterparts, such as USD and GBP. 

And while currencies like the US dollar can fluctuate in price on a daily basis, why do none of these fiat currency values seem to fly around quite like crypto?

 Again, why is crypto so volatile?

Well, it seems that the answer lies in the fact that what’s largely seen as crypto’s biggest benefit could also be a sizable drawback. 

Because cryptocurrencies are usually decentralized, it means that there is no central governing authority to regulate the production, sale and distribution of these coins. 

For example, the US congress and federal banks are responsible for the printing and circulation of the US dollar. Although Forex trading can affect the price of USD, the overall value won’t fluctuate as much as cryptocurrencies do, because USD is managed by these large institutions. 

Furthermore, fiat currencies like USD were historically backed up by another commodity, such as gold. Having a currency supported by another asset is an additional way of keeping a handle on its price, and cryptos don’t have this luxury. 

That said, being decentralized isn’t the only reason why the price of cryptocurrencies changes so much. 

As we’re about to see, there are many other factors that influence crypto’s instability and price…
 

Key Factors That Influence the Price of Crypto

Here we’re going to take a look at just some of the key factors that influence the price of cryptocurrencies. While this list is not exhaustive, it will give you a good idea of why the price of crypto fluctuates so heavily. 
 

Supply and Demand

The first rule of economics! As a general guideline, the smaller an object’s quantity, the higher the price. 

Of course, it’s never as simple as that. But with some cryptocurrencies, such as Bitcoin, there is only a finite number of coins in circulation, with no more being produced. Ever. 

Therefore, there will only ever be a limited number of BTC on the market which, if the coin remains popular, should keep the price relatively consistent. 

However, other cryptos keep generating new coins. One such example is Ethereum, which creates new ETH every time it’s mined. 

So by the same rule of thumb, this should reduce the overall value as more and more ETH coins are introduced into the market. 

But that simply isn’t the case! In fact, ETH is on the rise, whereas BTC seems to be suffering in recent times. This means that there are other elements that affect the price of crypto more heavily, and the basics of supply and demand aren’t enough to govern the value of crypto alone. 
 

Production Cost

When it comes to creating crypto coins, there are two main production costs to consider: the hashrate and the energy used by miners. 

Miners get rewarded for verifying transactions on the blockchain. They complete complex mathematical calculations, which record the transactions and bring new coins into the marketplace. 

However, the power needed to mine coins is enormous. And whereas anyone could mine crypto at home using their PC a few years ago, nowadays mining is usually done by large companies using specialist computers. 

This makes mining a very expensive business, especially in terms of energy consumption. And don’t forget, miners are in competition with each other. Therefore, if there are too many miners all working on the same coin, it makes it far more difficult to mine. 

In turn, this encourages miners to switch to a less competitive coin, which then has a short-term effect on the volatility and price of the coin. 

Hype and Awareness 

Tied into supply and demand, the awareness of a coin is paramount to its success. It also has a bearing on the price; certainly at the beginning of a coin’s introduction into the market.

For instance, Dogecoin was incredibly hyped up across the media, as it was initially created to poke fun at Bitcoin. 

This kept it in the crypto press, and as a result DOGE prices rose, and it is now considered a serious coin in the crypto space. 

While we are not suggesting that creating a gimmick is a sure-fire way to guarantee a new coin’s success, clever marketing, a USP and consumer awareness inevitably have a bearing on the price of a cryptocurrency. 
 

Competition in the Marketplace 

Again, married to other factors in the cryptosphere, the overall competition will affect the prices of crypto. 

That’s why it’s so important for a coin or token to have a USP. Otherwise, it may launch successfully, but later fall foul of the old ‘too many cooks in the kitchen’ adage. 
 

International Law

Even though cryptocurrencies are decentralized, they still have to comply with local and international laws and regulations. This can have a huge impact on the price of a coin, especially when a country prohibits or restricts its use among its residents. 

A good example is when China banned Initial Coin Offerings (ICOs) and froze trading on various cryptocurrencies in September of 2017. The fallout from this was a massive fall in the price of Bitcoin over a period.
 

Whales 

As the name suggests, whales are a big factor when it comes to all things crypto. Simply put, a crypto whale is someone who owns a large amount of currency; like a majority shareholder in a company. It may be one individual, a large group or a massive company; the result is the same.

Due to the sheer volume of coins they own, whales can have a huge influence on the price of a currency. This has led to concerns that whales are able to manipulate the market, with some calling for caps to be put on the amount of crypto one person or entity can own. 

But of course, one of the cornerstones of crypto is that it isn’t governed by centralized institutions. So controlling whales could be seen as conflicting with the ethos behind cryptocurrencies. 

Although it’s easy to see how whales can benefit from manipulating the market in their favor, the actions of whales can also be hugely beneficial for a currency and us mere mortals. 

For instance, in December 2021 a solitary whale bought up a whopping 4 billion Shiba Inu tokens, with an estimated value of about $130 million at the time. This led to an overall hike in the price of SHIB; possibly for the simple reason that people believe if a whale buys a large amount of crypto, it must be worth the investment.
 

Changes in Interest Rates 

Although we like to separate the two, the fact remains that fiat currencies and cryptocurrencies have to coexist together in a finely-balanced ecosystem, like some sort of capitalist yin and yang. 

Therefore, aspects that affect fiat currencies also have an impact on the crypto world. One such factor is good ole inflation. 

Whenever there is a rise in general inflation, people tend to cool their jets when it comes to high-risk investments. 

After all, if the price of filling your car with gas has doubled, and it’s costing you twice as much to fill your fridge with food, is it really the best time to plug your hard-earned cash into a risky new crypto investment?
 

Global, Geopolitical, and Economic Events

Just like inflation affects us all, so do global events. And let’s face it, when it comes to global one-offs, the last couple of years have been a doozy! 

From a global pandemic to the war in Ukraine, life-changing events impact the price of pretty much everything, including crypto. 

Again, while we would like to think that digital currencies exist on another, altogether untouchable plane, this just simply isn’t true. So if the price of fiat currencies is affected by a global event, chances are that crypto won’t be far behind. 
 

Conclusion 

There seems to be no end to what influences crypto price. From Biblical plagues and crypto whales, to the cost of electricity and whether or not your coin has a picture of a dog on it, there will always be something to send the price of crypto spiraling up or crashing down.

But isn’t that the fun of it?

Cryptocurrencies continue to be fickle, which means you have to be quite ballsy to invest in these coins in the first place. But like most high-risk investments, the returns could be huge!