How Are Crypto Prices Formed?

Even beginner traders know how quickly crypto prices can fluctuate. Whilst most assets have a physical presence, crypto is fully digital. This contributes to the erratic nature of the crypto market. So, how can you accurately guess whether a crypto asset will rise or fall in price? Why are certain coins going up? What causes others to fall? 

Using the factors below, you can predict how a coin will perform in the crypto market. But remember, the pricing of cryptocurrency doesn’t have a rigid structure and coin performance can be unpredictable. Due to this, it’s vital to consider other external factors when determining how to balance your portfolio. 

But for now, let’s discuss the key factors that help to determine cryptocurrency prices!

Which Factors Determine Cryptocurrency Prices?

Ready to learn more about the pricing of crypto coins? You’re in luck! Let’s explore what gives cryptocurrency value: 

• Supply 
• Demand 
• Market Sentiment 
• Competition
• Availability 
• Production Cost
• Community support 

Supply 

One of the main contributors to a cryptocurrency’s price is its supply. The supply of a crypto asset refers to the amount of coins that exist. A crypto’s circulating supply is how many coins are currently in circulation. Its maximum supply is the total number of coins that will ever exist. 

Some cryptocurrencies have a fixed supply, meaning that there is a cap on how many coins can come into circulation. For instance, Bitcoin has a fixed supply of 21 million coins. Other coins may have a dynamic supply, which means the total number of coins in existence can increase over time. Whether a crypto has a fixed or dynamic supply can dramatically affect the rate at which it will increase in value. This is due to supply directly linking with demand. 

Demand

Demand represents how many crypto investors are willing to buy a coin and how much each of them is prepared to trade. Various factors can influence a coin’s demand, including the ones we mention in this article. However, understanding how demand relates to supply is key for gauging coin prices.  

When a coin’s demand increases whilst its supply remains the same, its price will typically rise. This is because the coin becomes more scarce and sought after. Conversely, if a coin’s demand decreases or its supply increases, the price may fall due to oversupply. 

A coin’s supply can increase for various reasons, such as a large number of new tokens coming into circulation. This is how fixed and dynamic supplies contribute to coin prices. Similarly, a coin’s demand can rise due to external economic factors. For example, as inflation increases and the value of fiat currencies decreases, citizens may seek out crypto coins as an alternative store of value. 

The balance between the supply and demand of various coins is constantly shifting. Experienced traders have learned to use this volatility to their advantage by analysing market trends and making informed predictions.  

Market Sentiment 

The overall emotional state of investors can drastically sway crypto prices, both in a positive and negative direction. Whilst positive sentiment can result in more investments, driving up prices, negative sentiment can lead to mass selling, which will decrease prices. For example, when traders feel optimistic about the current cryptocurrency market and make investments, outsiders may start to feel the fear of missing out (FOMO). This will then drive them to join in and begin trading. 

Furthermore, traders often engage in herd mentality, which means they will follow the crowd. If a large group of investors are actively buying more assets and increasing their portfolio, others will also be incentivised to follow. 

On the other hand, if large communities or even individual influencers express negative sentiments, it can sway the opinion of traders, leading to a coordinated mass sell-off. This, of course, will then cause prices for hundreds of different crypto coins to drop. 

Competition 

New coins are constantly entering the crypto market, and more often than not, they come face-to-face with rivals. Whether it is a utility, governance, or security token, it’s likely that any new addition to the market will have to take value from competitors.

Many argue that the crypto market is already highly saturated, with thousands of coins already in existence. This is due to the low entry barrier for coins, which allows new digital assets to easily come into circulation. However, for a coin to become viable, it must quickly build a network of users, which is easier said than done. Coins that do not offer any innovation or unique attributes may not have a chance at sizing up against the competition. 

Availability

For traders to invest in a coin and, therefore, drive up its value, they must have access to it through their exchange or brokerage. If a specific coin is not easily accessible for traders, it may begin to lose value or struggle or gain any in the first place. 

Fortunately, the majority of well-known coins, such as Bitcoin (BTC) and Ethereum (ETH), are readily available through popular cryptocurrency exchanges like Gemini. However, lesser-known altcoins may have limited access. This is why we suggest that traders check out which coins an exchange supports before making an account. Traders who aim to seek out a broker can also check options like the Immediate Momentum platform beforehand if their chosen coins are available. 

Production Cost 

Another factor we must consider when discussing the value of cryptocurrencies is their production cost. PoW (proof-of-work) coins come into circulation through mining. On the other hand, staking produces PoS (proof-of-stake) coins. For participants to mine cryptocurrency, they must use a large amount of computing power and electricity. This requires powerful and expensive equipment. 

An increase in production costs can raise the value of cryptocurrency tokens. This is because miners won’t dedicate time to work on producing new coins if their value does not offset mining costs. For their hard work, miners will receive tokens and transaction fees after validating blockchain blocks. According to research, the price of Bitcoin is closely related to its marginal cost of production. Miners play a key part in blockchain operations and, therefore, can impact the market price of coins. 

Community Support  

The community of coins also plays a significant role in their value. A crypto with a supportive, vocal, and active community has a much greater chance of rising in price. In fact, there have been many instances where a coin’s dedicated community has inflated its price beyond expert predictions. One notable example is Dogecoin (DOGE) and its loyal community of ‘shibes’. 

Similar to other meme coins, Dogecoin has no intrinsic value or utility. Without real-world use cases, meme coins tend to rely mainly on speculation. However, against the odds, Dogecoin shot up in value during 2021 and now has a $8.63B market cap. This extreme price hike was thanks to the community of Dogecoin enthusiasts who flocked to social media to hype up the coin. 

Overall, Dogecoin is a perfect example proving how much impact a community can have over a coin. Even crypto assets that lack in other areas, such as having extensive competition or little availability, can still flourish in the crypto market.  

Final Thoughts

To conclude, several key factors can influence the value of crypto tokens. Some factors, such as competition, supply, and demand, can be directly controlled by the teams behind crypto projects. However, traders themselves can impact other factors, such as market sentiment, availability, and community support.

The complex interplay of these factors truly reflects the volatile and dynamic nature of the crypto market. Although it’s important to understand how crypto prices form, traders cannot solely depend on this information when making trades. The crypto space is unpredictable, and various events and developments can drastically influence it. 

Therefore, traders must always refer back to their budget and risk tolerance when making investment decisions. It’s also advisable to seek investment advice from a professional whenever possible. A combination of research, practice, and patience can increase the chances of profiting from cryptocurrency and capitalising on the complexities of the market. Now that you know how crypto can gain value, which coins have you got your eye on?