We saw the strangest and most wonderful thing in 2010 and 2011.
Bitcoin, a digital “currency,” went from being worth a few US cents to being worth $1. Then it would “explode” to more than $30 and “crash” back down to less than $2.
It was strange. It was great. It was almost impossible to believe.
It was also crazy risky.
This was the first time we saw how quickly the price of bitcoin could change. But that wasn’t what got us interested. At first, the price of the cryptocurrency was what scared us away.
But the idea that money could be made online for free and that anyone could get it was exciting.
And that was the start of more than a decade of interest, research, and investments in the most exciting asset class ever.
But the “price” of cryptocurrency is often the most frequently asked question about it.
How does a “price” work with cryptocurrency?
First and foremost, it’s important to know what you’re talking about when you talk about crypto price.
The price of a cryptocurrency is set in the same way that the price of a traditional currency or any other asset is set.
That is, through demand, supply, and a market where people can buy and sell things.
If I have one bitcoin and want to sell it for pounds, all I have to do is find someone who wants to buy bitcoin and is willing to pay pounds for it. This market is like any other. The price depends on how much the “market” is willing to pay to buy or sell cryptocurrency.
This is where the market forces of demand and supply come into play.
If the supply of a cryptocurrency is limited in some way, and demand for it goes up, the price of that cryptocurrency is likely to go up as well.
If the supply of a token goes up, its price should go down, assuming that demand stays the same or goes down.
These are simple economic principles which help to determine the value of any asset or good or service in a market.
In the end, a cryptocurrency is worth something because the market, which is made up of people, says it is. Due to the fact the demand for trading, buying, selling, investing in cryptocurrency is so high, and covers so much of the world, its “price” is simply based on what anyone at any given time is willing to pay for it and what someone on the other side of that trade is willing to sell it for.
What makes the price of cryptocurrency fluctuate so much?
The price of cryptocurrency is only volatile due to the nature of how and what it’s traded into. The price of bitcoin, for example, is almost always given in US dollars. The US dollar price of bitcoin fluctuates because of market forces, involving demand and supply as explained above.
In this way, cryptocurrency is very volatile in terms of fiat money. But if you change the number in the middle, it stays pretty much the same (the other side of the trade).
For example, the value of one bitcoin doesn’t change like it does with fiat money. The monetary policy of the central bank, which affects inflation, makes it so that one pound today will be worth less in the future. The central bank expands the money supply. That makes inflation go up. In time, the pound is able to purchase fewer goods and services than previously.
One bitcoin, on the other hand, doesn’t lose value because it doesn’t have a central bank to control it. By definition, it makes prices go down. This is because there is a fixed amount of it.
So, if you only ever price cryptocurrency in fiat money, you have to think about not only the dynamics of the crypto market, but also the dynamics of global fiat currency markets and central bank interference in global finance and currency markets.
Why do all cryptocurrency prices move together?
When you price cryptocurrencies in fiat money, it’s common for their values to go up or down at the same time. For example, when the economy as a whole is doing well and investors aren’t afraid of taking risks, this can affect the whole crypto market and cause the prices of many cryptocurrencies to rise.
But in this idea that prices “move together,” the trading pairs that cryptocurrencies are priced in are never taken into account.
Most of the time, there are three major trading pairs in cryptocurrency. Most of the time, it’s US dollars, Ethereum (ETH), and bitcoin (BTC).
Most of the time, the price of a cryptocurrency will be based on one of these three major assets.
Therefore, a fall in the price of bitcoin in US dollar terms will often be accompanied by a fall in the value of Ethereum in US dollar terms.
However…
When you price your cryptocurrency in bitcoin instead of fiat currency, things aren’t always as they seem.
When you start pricing cryptocurrency in something like bitcoin, you’ll find that the prices don’t move together. In fact, they don’t have much to do with each other at all.
But when there is a big change in how people feel about the market as a whole, the cryptos are more likely to move together. It’s the same with other types of risky investments, like high-yield bonds or emerging markets.
What can change the price of a cryptocurrency?
Several things can affect the price of cryptocurrencies. As mentioned above, the supply and demand of a cryptocurrency and, ultimately, what investors are willing to pay for it are important factors. Specifically, the supply of a crypto token can be changed by using things like lockup periods, coin burning, and supply rewards for staking.
Coin burning is when a network takes tokens out of circulation to make the value of the tokens that are still in circulation go up. Staking supply rewards are a way to cause inflation by giving token holders rewards for just holding on to certain cryptocurrencies.
News and rumours can also change the prices of cryptocurrencies. When reputable news sources write scary headlines about how the crypto market is “falling,” fear and uncertainty can grow and lead investors to sell their holdings. Even famous people and wealthy business owners have been known to move the cryptocurrency markets. For example, a tweet from Elon Musk, the CEO of Tesla, caused the value of Dogecoin to rise by more than 50% in February 2021.
The strength of a crypto network and community is another thing to think about. Innovation and development are key to the growth of a crypto network and lay the groundwork for a valuable token with a strong use case. This is particularly relevant with a crypto like Ethereum, which is known for innovation and a network that provides multiple use cases for developers and innovators.
In addition, traditional market regulation can affect cryptocurrency prices. Even though cryptocurrency is decentralised, the government wants to regulate it.
China’s plan to stop bitcoin mining in 2021 is a good example of this. In this case, investors may be less interested in crypto because of all the bad news about it. However, a limit on mining could reduce the supply of bitcoin and cause prices to rise. Regulations can have an effect on the price of cryptocurrencies either way.
Can you prepare and predict price changes?
Over the years, the prices of fiat currencies have changed a lot, and each change has been bigger and crazier than the last. Volatility is just a part of life.
If you are an investor, this makes the market risky. It’s important to manage your risk in the right way. The best way to start dealing with the volatility is to only risk money you can afford to lose.
So, you won’t be scared off by big price changes. That’s how we’ve been able to stay in the crypto markets for over a decade. Even if everything went to zero tomorrow (which it won’t), we wouldn’t lose sleep over it because we haven’t “bet the house.”
Not trying to time the market, but knowing that time in the market is one of the smartest strategies in crypto, will also help you last in this market over the long term.
