As cryptocurrencies become increasingly popular and widely adopted, more individuals enter this growing market. This influx of newcomers has led to a high saturation of inexperienced traders in the crypto market and financial markets in general. Bitcoin is the main driver of this trend, as more and more people are drawn in by stories of huge profits made from minimal investments.

When people enter the cryptocurrency market, they often wonder about the factors influencing crypto prices and how to predict future movements. Answering this question is crucial for becoming a successful trader. Therefore, it is important to examine the factors affecting cryptocurrency prices and understand them more deeply.

Crypto Prices: What Affects Them?

Discussing and analyzing crypto prices and their driving factors is complex. Unlike traditional stocks, where you can gauge a company’s performance and get a general idea of stock price movement, cryptocurrencies operate differently. They are not associated with any hard assets, meaning they have no tangible backing. Therefore, the price movement of cryptocurrencies is solely dependent on market sentiment. Let’s delve into some factors affecting these price movements and why they are crucial.

Bitcoin Price

When looking at the cryptocurrency market, Bitcoin holds a significant portion of the market capitalization, ranging from 45% to 50%. This means that the prices of most cryptocurrencies are closely related to Bitcoin’s price movements. In other words, if Bitcoin’s price increases or decreases, other cryptocurrencies’ prices tend to follow suit. However, if Bitcoin’s price fluctuates slightly, the impact on the rest of the market is not noticeable.

It is important to note that relying solely on Bitcoin’s price movement is not advised when trading.

Utility

It is important to consider the usefulness of a cryptocurrency token and how it is currently being used. Since cryptocurrencies operate on blockchains and are associated with various projects and networks using blockchain technology, most tokens have a specific purpose within their respective networks. For instance, Ethereum is the largest blockchain network and serves as a home to many projects and networks. To carry out different tasks on the Ethereum blockchain, users need to use Ether, the cryptocurrency associated with Ethereum, to verify and complete these tasks. 

If there is a high demand for projects and networks that operate on the Ethereum network, the price of Ethereum is likely to increase as demand for it rises. Conversely, if interest in Ethereum-based projects decreases, there will be less demand for it, which means that more people will be selling than buying, leading to a drop in the price of Ether.

However, cryptocurrencies are known to be volatile and have no backing from any assets. Therefore, relying solely on this one aspect to make trading decisions is not recommended.

Peoples Belief

Cryptocurrencies are unique assets that are not backed by hard assets, unlike traditional stocks or forex. As a result, market sentiment can play a critical role in determining the value of a particular token. In simpler terms, the price of a cryptocurrency depends entirely on people’s belief in the token and their perception of whether the price will rise or fall. If most investors believe that a specific crypto’s value will increase, it will likely spread quickly, causing an influx of new buyers. However, as soon as doubts start to creep in, people tend to withdraw their profits, causing a shift from buying to selling. This shift in sentiment can cause the price of the crypto to plummet.

Analyzing a cryptocurrency based on a single factor can be a challenging task. Sometimes, it can be easy to determine if a particular crypto has reached a favorable price point, and people are likely to withdraw profits, indicating that you should do the same. However, there are instances where a sudden change in belief or large amounts of crypto moving from one network to another can cause the price to change abruptly without any prior warning. In most cases, these changes are caused by a few factors that we will discuss further below.

Whales

The cryptocurrency market is unique in that it’s based on belief and speculation. This means that you can manipulate the market to your benefit if you have a lot of money and expertise. These experts are known as “whales,” they can easily change the market’s direction by quickly entering or exiting the scene. Since many crypto traders are inexperienced, they often fail to detect or ignore this manipulation, thinking it’s an opportunity to make a profit. 

For instance, if the price of Solana has been on a downward trend, whales can enter the market and purchase millions of dollars worth of Solana, increasing its price. This sudden price increase will attract other buyers who will purchase Solana, increasing its price even further. Once the price reaches a certain level, the whales who bought a large quantity of tokens for cheap will sell, making a significant profit and dropping the value of Solana back to its original level or even lower.

Many traders consider the “pump and dump” scheme a scam. Knowing how to spot these manipulations is essential to avoiding becoming a victim or, in the best-case scenario, taking advantage of them.

Geopolitics and the World Economy

Many might be surprised to see geopolitics and cryptocurrencies mentioned in the same context. However, we can observe some connections if we examine the crypto market and compare it to the current geopolitical and economic climate. Cryptocurrencies are increasingly used to hedge against inflation, similar to how we use gold, but with more risk involved.

There are rumors that governments invest in cryptocurrencies and sell them when they need money. For instance, during times of war, such as the ongoing conflict between Ukraine and Russia, the price of crypto appears to follow the conflict. It is believed that Russia sold a significant amount of crypto to fund its war efforts, which caused a decline in crypto prices. However, the price fall can also be attributed to people in Russia and Ukraine selling their crypto assets to raise funds for their safety.

Supply

Supply and demand are key determining factors for any asset, including cryptocurrencies. If there is high demand for a particular cryptocurrency and the supply is low, then the price will likely increase. On the other hand, if the supply is high and the demand is low, then the prices will decrease. 

For instance, Bitcoin is the largest cryptocurrency in the market despite Ethereum having the largest and most widely used blockchain. This is because there can only ever be 21 million Bitcoins, which means that the price of this asset is high as it is protected against inflation. However, Ethereum has an unlimited supply, so if the demand for this token increases, new tokens can stabilize the supply and demand.

It is a good idea to keep an eye out for cryptocurrencies that have upcoming burns. A crypto burn is when a specific number of tokens are permanently removed from circulation. This removal of tokens from circulation leads to a decrease in the supply of tokens, increasing the token’s price. Binance’s BNB burns are a great example of this. Binance conducts regular burns to stabilize the price of the BNB token and prevent the market from being flooded with many tokens.

Why is it important to know these factors?

Understanding certain factors is crucial to becoming a successful trader, especially in the volatile world of cryptocurrencies. More than simply relying on technical indicators and analysis may be required. While technical analysis is important, combining it with fundamental knowledge to trade cryptocurrencies effectively is better.

Once you understand how the crypto market behaves under different circumstances, you can easily predict upcoming trends and confirm your speculations. This knowledge will allow you to make informed decisions and back up your trades with solid reasoning.

FAQs on what affects crypto prices

What makes crypto prices go up and down?

Various factors can cause fluctuations in cryptocurrency prices. These factors are mostly based on speculations and predictions of these assets. The demand for and usage of these tokens can also impact their value. Furthermore, the geopolitical and economic situation of the world can also impact the prices of cryptocurrencies.

Can Bitcoin go to zero?

Bitcoin’s value is not based on any hard asset or utility on blockchain projects or networks. Instead, it is solely determined by people’s belief in this asset. While people may forget about Bitcoin, the possibility of that happening is slim. Even if its value drops to a few cents, it will still hold some worth.