5 Factors That Contribute to Cryptocurrency Growth
The cryptocurrency market shows an upward trend. In this article, we will present the factors that affect the price of crypto coins.
If you’ve been in crypto for a while, you may have seen the astounding returns it
can yield in a short time. Conversely, it’s not rare for coins like bitcoin to
fall by 50% overnight. When you look at the yearly charts, however, 9 out 10
cryptocurrencies have gone up.
Go back to last year, choose any coin in the top 50 — and you’re up by 100+%. But is it sustainable? Too good to be true? Here’s what drives cryptocurrency
Supply and Demand
Supply and demand drive prices long-term and short-term respectively.
Some coins have a limited supply, and others don’t have any restrictions. But
what makes supply valuable is:
- How it’s protected against inflation (unlike the dollar) — you need the right supply to improve liquidity without losing on the crypto price.
- How its utility differentiates from other tokens (a.k.a. competition).
For example, the top smart-contract projects include ETH 2.0., Solana, Avalanche, Polygon, and PolkaDot. If a new token appeared with the same utility, it would increase the “supply”, lowering its demand, regardless of token limits.
Demand affects price in two ways:
- Project awareness and utility. This is why most crypto is profitable long-term, and why Bitcoin and Ethereum have grown exponentially since 2019, along with altcoins like Fantom, Cosmos and Terra Luna.
- Supply (price). Depending on projections, high supply will lower demand, and low supply will increase it.
Bitcoin has a token supply of 21 million. By the time all BTC is mined, its demand will increase. Also, the block reward “supply” halves every few years, increasing
No matter the price, the cost still needs to be low enough to ensure demand. Production costs can lower the supply, and thus increase demand. Bitcoin mining, for example, gets more complex and expensive over time. Once we mine all 21 million bitcoins, it will likely spike the price.If a coin doesn’t involve mining (like DOT), its production costs may come from technology, network rewards and security.Costs can also drive demand down when it comes to transactions. Many projects are built on Ethereum (ERC-20), which may have massive potential. But because the ETH network charges $100+ in transaction fees, it excludes small retail buyers, even with perfect entry timing.
Crypto Market Competition
Regardless of the supply or demand, prices don’t reflect real value in crypto. Competition can lead to winner-takes-all situations, regardless of whose product is better. As for December 2021, ETH costs $4,000. While it might be the most popular smart contract, it’s not nearly the best. Many projects outperform its technology, such as Harmony One, Elrond and Polygon. While these projects will catch up long-term, they might never grow to overtake Ethereum. But if they do, they will take money away from competitors. It happened to ETH this September when Solana was breaking all-time highs.
How much time does a coin need to get adoption like bitcoin? Regulations can limit how quickly the project can expand. If governments accept the coin, however, it will be more accessible to buyers and get more emand.Governments can also affect prices negatively. Currently, many are debating on the regulation of bitcoin and crypto in the economy. Depending on the decision, prices could either spike or go down.This makes policymakers the most influential price factors short-term, followed by the crypto media.
While crypto is volatile by itself, news and speculation contribute to this
volatility. At any point, you can expect the top coins to either be undervalued
or overvalued. It rarely reflects anything close to the intrinsic token value. Of course, prices balance with the fundamentals long-term. But in the moment,
you’ll find traders buying the hype and “selling the news”. With enough
influence, you can mention anything about any crypto and create a price
reaction (e.g., Elon Musk’s Dogecoin). This is dangerous because speculators make money by luring new investors. Note that any reputable source can time the news to move the price conveniently, often without relation to the project’s development.Conversely, the lack of news will bring prices down (as well as demand). Tokens wouldn’t get as much awareness without it.
You can recognize the price factors. You can predict them individually. But when it comes to price predictions, uncertainty remains. Social psychology, bitcoin influence, limit-orders, competitors and global events — all have their impact on the cryptocurrency industry as a whole. Despite the short-term factors, you can make profits on blue-chip cryptocurrencies. If you bought bitcoin at the top in 2019 and sold at the bottom this year, you’re still up by 300%. The media sets the price range while the other four factors define the price level. While there might be dozens of them in general, these five factors are the most relevant for investors.