There is a lot of mystery that surrounds cryptocurrency. Still, after almost 15 years since they first appeared on the market, digital currencies have so many features that make them unconventional and unfamiliar to people. They have become a whole new industry and changed the way finance and investment work, and yet there are aspects users struggle to understand to this day. One of the biggest issues with cryptos is their sudden changes in value. This makes them a very tricky commodity to invest in and a challenging career path. Virtually overnight, all of your money can disappear if you fail to properly react to a huge drop in value. Similar to this, one has to be lightning-fast and decisive when a currency reaches all-time highs and decide if they want to sell their balance and make money.
These ups and downs are what prevent more people from investing in cryptos. But what is causing them, and why are they so widespread? They cannot actually be considered surprises anymore because it is a well-known fact by now. It is one of the things that makes Bitcoin and the rest what they are. Still, we will try to help you understand the factors that affect the ups and downs of cryptos right here and now. Keep reading the article to learn more and be sure to check out www.techtimes.com for additional information.
1. Supply and Demand
Source: forbes.com
The rules of supply and demand dictate the success and other aspects of most commodities that are being traded. The value of anything that exists is determined by the balance of supply and demand for it. When demand increases faster than the supply can react to it, the prices of the thing in question go up. When there is more of it to go around but nobody wants it, i.e. when there is more supply than demand, it becomes cheap. This whole system also applies to cryptocurrencies but there are certain differences. For example, the supply of many currencies is known in advance. Bitcoin, for example, can only have a finite (fixed) amount of tokens in circulation. Ether, on the other hand, is not limited by such a supply cap as there can always be more of it. Then there is the difference between monetary policies of cryptos as not all cryptos work the same way. Some tokens are dictated by the team in charge, others are freer. The demand also rises all the time as cryptocurrency trading and investment become more and more popular. It is always hard to afford something that everyone wants. It was easier to buy 1 BTC a decade ago when it was not yet worth around $40,000.
2. Production Cost
Source: ft.com
Again, this is an easy factor to understand because it also applies to any other commodity. When something is expensive to produce, it will have a high price tag. There is no going around this. New crypto is produced through mining, a now-famous and classic term that refers to finding new blocks of data and attaching it to the blockchain. In order to do this and expand the decentralized network, miners need to have a lot of computing power. Mining itself involves powerful computers known as mining rigs that combine dozens or even hundreds of expensive graphics cards that break down algorithms around the clock. This consumes incredible amounts of power and creates shortages in the computer hardware market. As more and more miners appear, they race each other to solve the complex max problems and verify blocks. To do it faster, they need better rigs, and so the demand for everything rises. The more competition there is, the more difficult and expensive mining becomes. And then, you guessed it, the value of cryptos goes up. It is an enchanted circle where one thing always leads to the next. As long as there is demand for the blockchain and cryptocurrencies, mining will be popular, more expensive, and competitive, which will drive the prices of everything up.
3. Halving Events
Source: medium.com
You may have heard about these already but do you know what they actually are? A halving event is a moment when the reward for mining and verifying a block is cut in half. Essentially, the miners are (seemingly) all of a sudden being rewarded half of what they were getting for the same amount of work. This event needs to exist because it cuts the inflation of the cryptocurrency and regulates the market. Many think of it as a reset of the whole industry because there is usually a lot of fuss about it. It is the time when many get in on the action, sell their balance, or buy more crypto. The coin that has the most influence is of course Bitcoin, and it has gone through several halving events already. It also impacts other digital currencies because they usually follow suit in terms of value drops. The last Bitcoin halving event took place on May 11, 2024, when the block reward became 6.25 BTC instead of 12.50. before that, it was 25, and 50 at first. The first halving happened at the end of 2012, the second in the middle of 2016, and the third in 2024. The fourth that would be half the price to 3.125 BTC can be expected in about two years.
4. Regulations and Legality
Source: medium.com
Last but not least, the general attitude towards cryptos and how each country and territory view it directly influence their ups and downs. Both in value and in general popularity, cryptos rise and fall whenever there is a new regulation or a law introduced that gives them more power or makes them an unwanted investment choice. There are places where any and all crypto activity is banned. However, there are also those that want to give the investors as many choices as they want. Have you heard that the new mayor of New York City received his first salary paycheck in Bitcoin and Ethereum? A place is a diverse place, it always has been, and a stunt like this is sure to attract more investors. But whenever there is a different sort of news, that crypto is a bad investment, a fraud, that they have been heavily regulated somewhere, or when someone famous speaks against them, their stocks drop.
