Factors Affecting Crypto Prices

 

Although the main factors that determine the price of crypto are supply and demand factors, there are several other factors that determine the price of crypto. Here are other factors that influence the volatility of crypto prices.

1. Monetary Policy and Tokenomics
Crypto supply greatly determines crypto price movements, so it is necessary to manage crypto supply which is known as "Monetary Policy", while its impact on crypto investors is known as tokenomics. To determine the number of coins/tokens in circulation, each coin/token has its own governance policy. In a crypto case, governance can be determined through voting (based on the number of crypto holdings), or using a centralized method, through a special crypto management board tasked with controlling the crypto supply. Some crypto developers, through their special board choose to burn crypto to reduce the amount of crypto supply in circulation. Like Ethereum, Binance Coin, Shiba Inu etc.

2. Production Cost
Crypto mining activities require mining costs, ranging from computers, mining hardware, air conditioners, electricity costs etc. All mining fees will have an impact on the crypto price.

3. Demand for Blockchain Technology
The demand for a crypto asset will soar if the crypto community takes advantage of the blockchain technology which is the home of the cryptocurrency. This happens because the fees for using the blockchain are paid using the blockchain's native cryptocurrency. So the demand for cryptocurrency will be in line with the increasing use of blockchain. There are various reasons why the crypto community swarms over a particular blockchain technology. Usually the three main reasons are better transaction scalability compared to other blockchain technologies, the emergence of new features, and the low transaction costs of utilizing the technology.

4. Mass Adoption of Retail and Institutional Investors
The massive increase in the use of the coin will lead to a strong price increase. This is because most cryptocurrencies have a limited supply, so an increase in demand will certainly raise their price. It's just that, to be mass-adopted, cryptocurrency must have clear benefits in the real world, for example, it can be used as a means of everyday payment. Cryptocurrencies such as Bitcoin have been adopted by institutional investors as a store of wealth. Hence, the price had increased and reached the point of US$ 60,000 per chip in early 2021. In addition, El Salvador also plans to use Bitcoin as an official means of payment in the country. Meanwhile, the pattern of cryptocurrency adoption by retail investors forms a bell-shaped curve, as shown in the following figure. Only 150 million individuals in the world hold crypto assets. When compared with the world population of over 6 billion, it can be said that the adoption of cryptocurrencies in the world is still in its early stages.
Both retail and institutional investors are starting to look to the long-term value of cryptocurrencies. The rapid increase in the prices of several crypto assets in 2021 is proof that the strong demand from institutional and retail investors continues to increase the demand and prices of cryptocurrencies. In addition to supply and demand, global macroeconomic conditions also have a strong role in influencing the price movements of crypto assets.

5. Fiat Currency Inflation (USD)
The price of crypto assets, especially coins that have clear uses, should increase amid moves by global central banks to continue to print money and implement low interest rate regimes. This can happen because the characteristics of the supply of fiat money are different from those of cryptocurrencies. The supply of crypto assets is fairly limited, so people should switch to this instrument if the amount of fiat money in circulation increases. It is important to remember that Bitcoin was created in response to the massive printing of fiat money (USD), which was being done by central banks around the world to deal with the global financial crisis. This move is likely to be repeated in every economic recession where policymakers have no choice to stimulate economic growth other than cutting interest rates or printing more money. 25% of the US Dollars in circulation today were minted in 2020. In addition, owners of crypto assets also now have the opportunity to profit from saving crypto assets by obtaining higher returns than saving in conventional banks. Now, this can be done along with the widespread use of decentralized financial applications (DeFi). High yields and tight inventories make crypto assets useful as hedges against inflationary scourges caused by printing money.

6. Government Regulation
A series of government regulations can affect the demand and supply of crypto assets. This condition can occur because the government has the authority to regulate, tax, or even prohibit cryptocurrency activities, which will usually lower the price of crypto assets. Crypto investors not only need to understand crypto regulations in their country, but also need to observe how the United States regulates crypto in their country.

7. Momentum
Like any other financial market, the price of crypto assets is determined by speculation. Retail traders, institutional investors, and global hedge funds have different views on market conditions and these differences can affect the price of cryptocurrencies. Price movements in the crypto market can be very fast and wide. This happens because many traders are using algorithms in exchanging cryptocurrencies. If the crypto price penetrates a certain point, the algorithm system will execute a buy or sell action. This action will then trigger the actions of other traders where their actions will then also affect the movements of other market participants. Since market participants tend to find it difficult to judge the price of crypto through fundamental aspects, attention is then directed by horrendous issues and news or calls to buy or sell by crypto advocates. For example, the price of crypto can crash when a crypto asset influencer, such as Tesla retainer Elon Musk, posts a tweet or creates a meme about cryptocurrency on his Twitter account.