Cryptocurrencies are different from stocks and bonds. While many people now invest in cryptocurrencies in the same way as stocks and bonds, there are critical differences in how they work. One significant difference is how the value of a cryptocurrency is decided compared to a stock or bond. Below are some of the key factors that determine cryptocurrency prices.
Supply And Demand
Supply and demand is one of the most critical factors affecting the price of cryptocurrencies. Essentially, the more coins there are in existence, the less each one is worth. If someone owns enough cryptocurrency coins, they can single-handedly influence the price by selling them all at once. This activity will cause the price to plummet as coins flood the market.
Similarly, purchasing a significant number of coins at once can deplete the supply and cause the price to rise. Pump and dump scams involve buying up a large number of coins, thereby raising the price, before selling them and causing the price to crash again.
The Costs Of Mining New Coins
Some cryptocurrencies will be minted and distributed when the network launches; there won’t be any coins added in the future. However, many coins, including Bitcoin, have a process for mining new coins as time goes on. Over time, mining new coins becomes more difficult, requiring more electricity and costing more.
As the cost of mining new coins increases, so does the value of new coins. There are now several studies that show the link between the prices of mining new Bitcoin and the cost of Bitcoin itself.
The Rewards That Miners Receive
When miners mine new coins, everyone who has contributed computing power will receive a cut of the rewards. With the costs of mining new coins continually increasing, the value of the rewards needs to scale up accordingly. Mining is vital for verifying transactions on the network as well as creating new coins; it is important to incentivise miners properly.
The Platforms They Are Traded On
There are numerous cryptocurrency trading platforms out there today. The value of any given cryptocurrency will be pretty similar across different platforms, but there may be some variation in price. More significant exchanges can influence the prices of cryptocurrencies to some extent by deciding which coins will be added to their exchanges and become available to trade. Being added to a significant exchange can transform the fortunes of a cryptocurrency overnight.
Taking Advantage Of Price Fluctuations
The rising and falling prices of cryptocurrencies are a big part of why they appeal to some investors. The large fluctuations might put off more cautious investors. But for other investors, those big fluctuations in price represent potential profits. A cryptocurrency CFD enables you to speculate on whether the price a coin will increase or decrease. Traders who can accurately predict whether the prices will rise or fall can make a lot from using CFDs. Just make sure that you understand them before you invest.
These are just some of the many factors influencing the value of cryptocurrency. Like any market, the crypto market is more complicated than many people realise. If you plan on trading cryptocurrencies in the future, make sure that you take the time to understand how the market works beforehand.