Unlike traditional currencies, digital assets are not issued by a central bank or backed by a government. For investors, buying a digital asset is different from purchasing a stock or bond because Bitcoin is not a corporation. Consequently, there are no corporate balance sheets, no fund performances to compare, or other traditional tools for choosing an investment. Cryptocurrency prices are volatile, and the prices change all the time. Let’s take a look at 4 things that impact cryptocurrency price.
1. Effects of Supply on Price
The supply of an asset plays a vital role in determining its price. A scarce asset is more likely to have high prices, whereas one available in plenty will have low prices. For example, Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time.
Trading volume is one aspect that affects liquidity pricing. Trading volume refers to the number of shares (or units of crypto) transacted every day. High liquidity in the marketplace is an ideal situation as it makes for improved prices for all concerned due to the large number of buyers and sellers in the marketplace. A buoyant marketplace with a high level of trading activity tends to create an equilibrium market price that is acceptable for all and not prone to large swings resulting from large trades which could affect cryptocurrency prices while fuelling increased volatility and risks for the general market.
3. Media and Reputation
Whilst there are factors that stem directly from the markets that affect the pricing of assets, the media can also influence them. In particular, if a cryptocurrency gains mainstream attention, there could be a sudden surge in popularity. This then spurs traders to start avidly buying that token, which drives the price up. Equally, the opposite can occur. If a token or an exchange gains a bad reputation in the media it can prompt traders to cash out before the price plummets and they lose more money.
4. Regulations and Crypto's Price
Regulations play an important role in crypto prices. Any cryptocurrency rulings, ban or approval do have a direct effect on the price. For example, China’s bitcoin trading and transaction ban in September 2021 affected the cryptocurrency supply and demand. Mining farms in China were forced to pack up and move to cryptocurrency-friendly countries. Prices fell from around $51,000 at the beginning of September to about $41,000 at the end of the month.