6 Key Factors That Affect Cryptocurrency Prices
Cryptocurrency has long been known as the most volatile type of currency out there, leading many people to avoid investing. But just like in traditional currency or stock markets, there are several obvious factors that can help indicate a price drop or rise in a currency is coming.
While we can’t guarantee everything on this list will always indicate a pending price change, it is a good place to start. So read on to discover some of the factors that may affect the prices of cryptocurrency in the future.
6 Indicators that a Crypto Price Change is Coming
1. Regulation
Currently, one of the number one factors which lead to a price rise or drop, especially in cryptocurrency, is government regulations.
When cryptocurrency first started out, it was largely unregulated. As governments around the world struggle to catch up, several currencies are currently being fined, investigated, and shut down because of how they operate.
That being said, government regulation isn’t always bad. The recent Bitcoin ETF approval caused prices to skyrocket as institutions started investing in the currency, leading to happy investors everywhere.
Basically, if you plan to buy or invest in cryptocurrency, then it's time to start monitoring the news because any single announcement could give you warnings of price rises or drops to come.
2. Supply and Demand
After government regulations, it’s important to recognize that many cryptocurrencies fluctuate in price due to the laws of supply and demand. This is especially true for proof of work-based blockchains, like Bitcoin, which see fee spikes whenever more individuals want transactions completed.
Basically, as demand goes up, the price goes up. As supply increases, the price decreases. This is basic economics, and it applies to almost every blockchain out there, though it is more obvious with those that can’t just increase production to meet demand (i.e., Bitcoin, which is notoriously slow).
3. Expanding Adoption
Adoption combines supply and demand with government regulation to be the next big indicator of a coming price swing. As more and more people, and countries, adopt cryptocurrency as a regular currency, the higher prices tend to rise.
This happens because when a country like El Salvador adopts Bitcoin as legal tender, this increases demand, and is considered a positive government regulation. Therefore, people may rush to buy it for use, or just because they see it as a good direction for the cryptocurrency to be growing in.
While adoption and government regulation go hand in hand, adoption is generally always positive, while government regulations can cause prices to swing in either direction.
Related: Bitcoin Adoption Expands in South America
4. The State of the Economy
Just like with regular stocks, the state of the economy also influences crypto prices. This is for several reasons which are a bit hard to explain, but we will do our best.
First and foremost, cryptocurrency is seen a bit like digital gold, or a hedge against inflation, especially Bitcoin. As such, the price of Bitcoin tends to follow the price of gold. This is confusing because the price of gold tends to be the opposite of the market.
When the market is good, and the economy is booming, people buy less gold because they feel more secure in fiat money. But when the economy takes a turn for the worse, they buy more gold as they feel it is safer than fiat cash. Bitcoin is seen as a similar medium and thus it tends to be more in demand during economic downturns.
That being said, cryptocurrency is also treated as something extra, meaning when people are struggling to eat during hard times, they’ll sell their crypto. This means that while the prices of crypto tend to follow those of gold, it isn’t near as reliable as the metal—as it isn’t accepted everywhere just yet.
Related: Is an Economic Recession Coming in 2024?
5. Competition
Just like in the regular stock market, the launch of new products in competition with an existing one can cause price fluctuations. While this isn’t usually an issue for Bitcoin, it is a very big indicator for several smaller yet major coins.
The main example we have of this is Solana, which was launched as a direct competitor to Ethereum. Although it didn’t have a huge impact on the price of the coin, Ethereum did see a slight dip at launch as investors closed out their positions to open new ones on the developing blockchain Solana.
While Ethereum has since recovered and risen even more in price, it was still a valid concern at launch. Any investors in the industry should keep an eye on the news, and know that when new products are launched, it may affect the prices of their current positions.
6. Social Media
Unfortunately, social media has gotten very tied up in both cryptocurrency prices and the stock market prices. An example of this is during the COVID lockdown when a bunch of Redditors rallied to buy AMC stock.
In the time since, the same has happened in the crypto world, mostly in regards to Dogecoin, which Elon Musk affected the price of by posting on Twitter.
No matter what news you see on social media, know that it is dangerous to buy stock or crypto after seeing a celebrity posting about a currency. These posts can be paid for, misleading, and outright fake, leading to false price fluctuations that could cost you your entire investment.
In general, we recommend watching social media from a news perspective—so you know what to expect of certain announcements, but never use social media as an indicator to buy a currency.
Overall, there are probably even more indicators than this, but these are the ones we see that affect prices on a daily basis. While it is important to be aware of these causes, remember that this isn’t official investing advice and that any changes you intend to make to your portfolio should be reviewed by a professional.
You May Also Enjoy: Bitcoin Price Prediction: Where it’s Going (2024)
