Cryptocurrencies have been around for a while, and they’re here to stay because the market is continuously emerging. But although it has been rising, the cryptocurrency value fluctuates sometimes, and the factors are unexpected and uncontrollable. Of course, that isn’t a reason to stop investing, but it can be a real challenge for beginners and even advanced investors. So, in the following paragraphs, we’re going to see why the market is not constant and what are the influences on cryptocurrencies.
Emerging market
As it grows, an emerging market becomes more engaged with the global market, which is what happened to cryptocurrencies. Since 2008, when the first virtual coin (Bitcoin) was introduced in the market, digital communities have grown and developed, and now you can find about 1500 cryptocurrencies out there. This influenced the price of Bitcoin and Ethereum (the second most used coin) and gave people new opportunities to create and have their own currencies.
Cryptocurrencies are increasing due to innovation and the desire for constant improvement. Even if Bitcoin was providing sufficient coins for people, Ethereum was created with the intention to be more than that ― a place to hold your digital money, make global payments and create and use applications.
Moreover, with the rise of NFTs and Dapps, some cryptocurrencies also gained popularity because you could make such transactions only on certain ones (like Ethereum). Therefore, if in 2010 only investors were interested in this coin, now gamers, writers, musicians, and even companies use Ethereum to share and sell their art pieces, products, or services. Soon, as the market evolves, a new use of coins will be discovered, increasing the popularity of cryptocurrencies.
Supply and demand
The supply and demand rule is an economic policy that can apply to almost anything, from fiat money (government-issued currencies) to virtual currencies. For example, if there’s an excess of supply and the demand is low, the price will decrease, and vice versa.
But what’s interesting about cryptocurrencies is they don’t have the same coin supply. For example, Bitcoin is limited by about 21 million coins, with the current supply being 19.09 million. That means it’s more difficult to mine, as fewer coins will be available for the general audience. On the other hand, Ethereum has an unlimited supply and 121.5 current mined coins, and the blockchain is still updating. With the next version of Ethereum, you’re supposed to mine easier, which is an optimistic view for all investors.
Regarding the demand, cryptocurrencies became popular because they’re easy to transfer and not issued by a bank or financial institution, which made more people interested in them, increasing the demand. Other reasons why the demand increased are security, low charges and lots of cryptocurrencies to choose from.
Trading time
Maybe you’ve heard that there are fewer trades in the market on weekends. That’s because the same trade size can move prices a lot more when the volume is low. It’s possible that with the banks closed over the weekend, investors may not be able to add money to their accounts, which is why there’s less trading.
The type of mining you use is also important because there are a few mining methods that are more or less efficient and energy-consuming. For example, CPU mining (that uses a computer’s central processing unit) isn’t too good for Bitcoin as it doesn’t have enough power, but you can choose to mine in groups (called mining pools) to get more chances to mine new blocks.
That’s why some cryptocurrencies have to up their game and make improvements to let more people mine and not get discouraged by the complexity of the process. Ethereum, for example, will change its proof-of-work to a proof-of-stake that will make transactions faster. If you want to check out the Ethereum price, consider these factors when interpreting its fluctuations.
Social media
Media coverage plays a decisive role in stimulating the demand for cryptocurrencies. A few years back, Bitcoin was all you’d hear about on the internet. Tech influencers were talking about its benefits and why it will become the future of transactions, celebrities were tweeting about it, and overall, the media was jammed with information, although not simple enough for everyone to understand.
Also, let’s not forget how Elon Musk’s tweet about Dogecoin made the currency’s popularity rise by 8% in a few hours. What’s funny about this currency is that it was created after a meme, and you could earn free coins by doing basic tasks online (watching an advertisement or taking a survey).
Generally, social media is responsible for fluctuations, and it can also affect the demand because, as we’ll further discuss on, people’s opinions about the coin’s stability can be easily influenced by someone else. Even if social platforms can help stakeholders to make better decisions and educate themselves, they don’t always provide an objective view of the market.
Investor and user sentiments
Investments are mostly based on trust. If social media shows that a cryptocurrency is in good shape or if others are buying coins and encouraging people to invest, of course, the course of the market will be influenced, making more people interested. Also, some papers found out that the prices of smaller cryptocurrencies will be affected if the dominant ones (Bitcoin, Ethereum) fluctuate.
The term for this phenomenon is called market sentiment, which refers to investors’ overall attitude toward a certain financial market (in this case, cryptocurrencies). For example, rising prices indicate bullish market sentiments, while falling prices indicate a bearish movement.
Some components of the Volatility Index can measure this indicator, and it’s mostly used by investors who profit by finding stocks that are overvalued or undervalued on the market.
Final thoughts
The cryptocurrency market is not made with the intention of stability because so many factors influence the prices and popularity of one crypto coin. The system works similarly to the traditional financial one. Still, there are no banks or other institutions allowed, which benefits investors, but it can also make the mining process more challenging.
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Source: https://www.thecoinrepublic.com/2022/09/08/5-reasons-why-the-cryptocurrency-market-fluctuates/