Understanding the causes of cryptocurrency price fluctuations

The  first thing which many crypto lovers around the world do in the morning is to check  prices of  cryptocurrencies of their choice. This is because prices of cryptocurrencies determine part of one’s wealth, since coins or tokens are their assets. Unfortunately, so often, we wake up to hear that the market has tumbled or the price of a specific cryptocurrency has decreased. Beginners in the crypto and blockchain sector may become distressed when prices of coins they invested in fall..  However, understanding the drivers of price fluctuations can help you to maintain composure and make best decisions.

Causes of fluctuations in prices of cryptocurrencies

There are several causes of price fluctuations. However, this article explores only the major causes.

Price manipulation

Some crypto exchanges manipulate prices of cryptocurrencies, thereby profiting from that. Although there are many decentralized exchanges, there are also centralized ones, which may manipulate prices of specific cryptocurrencies.  Usually, centralized exchanges alter price feeds of cryptocurrencies, thus sending a signal to users to buy or sell them.

Increase in cryptocurrency holders and investors

When there are many new cryptocurrency buyers and sellers, prices of particular coins or tokens change.  New cryptocurrency users normally push prices of  cryptocurrencies up.  As more people trade cryptocurrencies, their price volatility increases.

Uncertainty about the performance of cryptocurrencies in the future

When there is uncertainty about the future prospect of cryptocurrencies, price fluctuations occur.  The main factor affecting uncertainty is varying views of crypto users, especially influential traders, advisors and analysts.  At times, news relating to cryptocurrencies affects their prices.. For instance, many analysts believe that news about higher energy consumption in the bitcoin sector resulted in the mid May (2021) market crash.

However, positive news about cryptocurrencies drives their prices up.  An instance of this is when influential countries promise to adopt certain cryptocurrencies like bitcoin or ETH as their legal tenders.  Such a move has already emerged, with El Salvador already promising that.  Such news creates a positive vibe on cryptocurrencies, leading to higher prices.

Supply and demand

Like in the case of many products, the change in supply and demand of cryptocurrencies may result in price shifts.  For example, if a certain blockchain locks much cryptocurrency , the circulating supply decreases resulting in higher prices. Conversely, if a blockchain unlocks or mints more crypto coins, the price of its cryptocurrency may drop significantly.  The fluctuation of prices arising from a reduction in the circulating supply of a certain cryptocurrency is one reason why some companies burn their tokens or coins.

Utility of a token

The utility of a certain token affects its price movement. Utility is about how useful the token is in our day to day life.  Utility tokens are used for buying and selling of goods.  Some companies allow people to buy goods using certain cryptocurrencies, usually those that are in the top ten according to market cap. As of now, many companies allow people to pay for goods and services using major cryptocurrencies like bitcoin and ETH.

 Interestingly, many companies accept stable coins such as USDT or USDC as means of payment. However, the value of stable coins is not influenced by these factors, as they are pegged against major fiat currency such as the United States Dollar (USD).

The mining process

The way in which investors mine a certain coin influences its price. In normal cases, if it is difficult and expensive to mine a coin, it maintains a high price.  The cost of mining is determined greatly by the amount and cost of electricity used in the mining process.  For example, proof of work (PoW) consumes much energy.

Regulation of cryptocurrencies

Crypto regulations which governments make affect their prices. Currently, there are fragmented laws governing cryptocurrencies in many countries around the world.  In recent days, some countries like China have been clamping down on crypto operations in their countries. This has a negative impact on their prices. A case in point is the legal battle between the United States Government and Ripple, which adversely affected the price of the TRX.

Conclusion

In brief, there are various reasons that affect prices of different cryptocurrencies. Supply and demand, legislation, public sentiment, mining difficulty and  speculation  are examples of such factors. Understanding the particular reason for a specific price change can help investors to make informed decisions.