Cryptocurrencies have emerged as phenomenal assets for those looking to earn profit from alternative investments. However, only a few people know what the factors with power over the price fluctuations are, and therefore, an article to provide information about this aspect is highly useful for someone who wants to add digital assets to their portfolio.
Digital currencies like Bitcoin and Ethereum are famous for their eye-popping price changes, and someone trying to make an Ethereum price prediction should be aware of the factors that could trigger price swings.
If cryptocurrencies leave you curious and you consider investing in blockchain-based assets, here are some pieces of information you might find interesting.
What Impacts Crypto Prices in the Long and Short Run?
The crypto market is oversaturated with thousands of assets, and while most share similar features, many projects stand out. A common thing about cryptocurrencies is that it’s challenging to predict their price or identify their fair value, so one cannot apply traditional valuation methods and expect the same results as traditional digital currencies.
However, a series of factors impact their price evolution, and here is the list.
News Reports
News announcing investments in a particular crypto project, the adoption of digital currency as payment for particular services and products, or the acquisition of cryptocurrencies for an organization’s reserves will positively affect price evolution. On the other hand, an announcement that a company removed a digital currency from their list of payment methods could negatively impact the price. A well-known example is that of Tesla when Elon Musk announced that the company would accept digital currencies as payment methods in 2021, and the prices surged immediately. Several months later, when the company decided to accept Bitcoin payments due to environmental concerns no longer, its price dropped.
Social Media and Public Sentiment
Crypto experts use the Fear and Greed Index to measure the market sentiment and figure out if the market heads toward a bull or bear phase. Bull markets are well-known as lucrative periods for investors because the prices surge steadily, and they can adapt their strategies to make a profit. Bear markets make it more challenging for investors to increase their return on investment because discounted prices and capital outflows characterize the market. The market sentiment is usually positive during bull markets, which mobilizes more people to join the sector, thereby triggering increased prices.
Social media also plays a significant role because news is usually spread via social media platforms. Important personalities like Elon Musk use social media to engage with the public and share their thoughts on different crypto projects. The media hype surrounding a project impacts its trading volume positively or negatively, according to the type of news that reaches the audience.
Economic Performance
Digital currencies are high-risk investment assets compared to their traditional counterparts. Therefore, they should be treated accordingly because they have the habit of performing better when the market is in a bull run. Investors are more willing to purchase cryptocurrencies when they feel the market could favor them. On the other hand, cryptocurrencies usually register price drops when the economy performs far from well, or it’s expected to experience hiccups. Investors aren’t willing to add to their portfolios assets they cannot evaluate in terms or price evolution.
Node Count and Listings
The node count is important when trying to predict a crypto’s price because it provides information about the number of computers linked in the blockchain network. The number of nodes is a direct reflection of the community’s strength, and investors want to join projects with strong communities because they can impact a crypto’s evolution in the sector. They also use node count to determine if a digital currency is overbought or is fairly priced. When trying to determine what cryptocurrencies to pick from a list, they also compare their node count to figure out how many people interact with a project and how popular it is in the market. An increase in the node count will usually trigger a value spike.
The listing of blockchain-based assets on well-known and reliable crypto exchanges also impacts their prices because the more exchanges list them, the more accessible they are to crypto traders.
Cost of Production
As expected, this is also a factor that influences the prices of digital currencies. Depending on the algorithm behind the project, creating new coins might cost more or less. The projects that rely on the proof-of-work consensus require miners to use special hardware and servers to confirm new blocks and produce new tokens. Miners gain rewards for confirming blocks, which come in the form of tokens and network fees. The higher the mining cost, the more a digital currency will cost. However, not all currencies use this production method, so their value might not be influenced by it.
Regulatory Action
Government regulation has always been a source of uncertainty for cryptocurrencies, regardless of their time on the market. Government regulation dictates the evolution of digital currencies in some states and even prevents people from buying them.
For example, Bitcoin’s price dropped 8% when China banned its citizens from mining it. On the other hand, when countries like the USA created favorable regulations surrounding cryptocurrencies, they registered price spikes. Investors prefer to add assets approved by their local government to their portfolios, and this doesn’t differ for cryptocurrencies.
Macroeconomic Factors
Cryptocurrencies are often considered hedges against macroeconomic factors, but that doesn’t mean they are immune to exterior influences. For example, people could decide to limit the amount of money they put into alternative assets like digital currencies during economic recessions, which will trigger a drop in price.
Final Thoughts
It’s widely known that digital currency prices fluctuate, but for someone intending to add these assets to their portfolio, it’s also important to understand the factors driving these movements. The above information should help someone who just joined the market better understand the metrics they have to pay attention to.
