What Affects Crypto Prices? Factors Driving the Crypto Market
Understanding what drives crypto prices is crucial when developing strategies, identifying opportunities and trading cryptocurrencies. Our market guide will help you to learn what affects crypto prices, enabling you to manage risk effectively.
With Tradu you can trade crypto via CFDs.
As with the forex market, commodities and indices, there are multiple factors that influence cryptocurrency prices. Read on to discover more about what these are:
- What drives crypto prices?
- How does market cap affect crypto prices?
- What other factors affect cryptocurrency prices?
- Economy
- Regulations
- New cryptocurrencies
- News
- Market sentiment
- Using analysis in cryptocurrency trading
- Check crypto prices with Tradu
What drives crypto prices?
Like most markets, supply and demand is the overarching factor that drives crypto prices. Essentially this just refers to how many investors want to buy a product and how much there is available. The value is then determined by the difference.
When supply is limited and demand is high, the price generally increases. But when there is an unlimited supply and demand falls, the value decreases. Overselling and overbuying can also create dramatic price movements within the crypto market. This means that an asset ends up trading way above or way below its expected value for a potentially unpredictable amount of time.
There are many types of cryptocurrency and each coin will be affected differently by various factors. But there are many influences that can affect the crypto market in general.
How does market cap affect crypto prices?
In the crypto market, market cap (or market capitalisation) refers to the value of all mined coins. Market cap can change rapidly as it's calculated by multiplying the price of one coin by the total number of coins that are in circulation.
It's important to note that, unlike other more traditional markets where higher numbers of a product can be manufactured to suit demand, some cryptocurrencies have a limited and maximum supply, due to the network on which they're distributed. Examples of these include Bitcoin and Litecoin. This means that there will only ever be a certain number of these crypto coins mined and in circulation.
A smaller market cap can result in a more volatile market whereas a larger market cap is likely to create increased stability. A stable cryptocurrency is more likely to be in demand due to the perceived lower levels of risk. With this in mind, it's easy to see why market cap can, in turn, affect individual crypto prices.
What other factors affect cryptocurrency prices?
As well as supply and demand and market cap, there are also multiple other key influencers that affect cryptocurrency prices:
Economy
When assessing what affects cryptocurrency prices, the economy is a major factor. Most markets are affected somewhat by the economy, particularly in relation to inflation, interest rates, recessions and unemployment. However, the crypto market is often affected slightly differently than other markets.
When inflation and interest rates rise, investors seek to hedge their investments elsewhere, away from products that are directly affected. Cryptocurrencies offer an alternative form of asset trading and investment so some coins might see their prices rise in this situation.
However, other cryptocurrency coins are pegged to a fiat currency, such as Ethereum, so it's common to see the price of these directly influenced by that particular currency and economy.
While some crypto coins might offer more stability in poor economic conditions, unlike gold, for example, cryptocurrencies still tend to suffer from overall increased volatility. It's therefore important to manage risk accordingly if you're considering hedging with this asset class during times of economic uncertainty.
Regulations
Some cryptocurrencies, such as Bitcoin, are decentralised, meaning that coins are distributed across a network, rather than being tied to a central, governing body such as a financial institution.
Decentralisation is one aspect that particularly appeals to many Bitcoin investors, providing independent control and transparency. It's easy, then, to see how introducing new regulations surrounding the distribution or use of such coins, via a government or other authority, can be a factor in what drives down crypto prices.
Even the potential or talk of governments wanting to regulate the crypto market can decrease the value of certain coins.
New cryptocurrencies
Increasing advancements in blockchain technology and new and emerging cryptocurrencies can affect the market and drive down the prices of other crypto coins, especially if there's a significant change in people's investments.
As technology is constantly changing and becoming quicker and more responsive, older coins built on less advanced networks could suffer.
News
News releases and announcements can affect all markets but the cryptocurrency market has a particular tendency to suffer from increased criticism from mainstream media channels, due to its volatility and relatively recent emergence.
For example, news of the FTX collapse shook the cryptocurrency market and impacted various digital currencies across the industry. Similarly, news of the Terra network collapse created a decrease in value for other major crypto coins.
Often, recovery from news and events such as these can take significant amounts of time as investors struggle to regain confidence in the comparatively untested market.
Market sentiment
Rather than being a standalone factor, market sentiment is often a result of one or more of the above factors in what affects cryptocurrency values.
Trader reactions can create knock-on effects across the market as people gain or lose confidence and change their investments accordingly. This then has the potential to bring about new trends, resulting in a newly bullish or bearish market.
Using analysis in crypto trading
When trading crypto, it’s important to take into consideration all of the above factors before creating a strategy.
As well as analysing historical data, it's a good idea to research and identify technical indicators through charts and patterns to determine trends and market direction. Our guides to fundamental and technical analysis will help you to learn how to utilise these tools in your trading.
It's also vital to assess risk management when developing a crypto-trading strategy that works for you.
Read our guides below to find out more:
Check crypto prices with Tradu
Now that you know what affects cryptocurrency values, the best way to keep up to date is by checking digital currency prices via our dedicated market page.
Use our advanced platform to monitor news and trends and take advantage of our trading analytics to help to determine your next trade. With real-time updates, it's easy to stay informed with Tradu.
Sign up for an account, refine your strategy and begin trading cryptocurrencies via CFDs today.
The information in this article is for educational purposes only.