Jasmine Birtles
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What Makes Crypto Go Up and Down?
Ruby Layram
27th Sep 2024
It’s no secret that cryptocurrency can be a bit volatile! New coins can quickly go up, providing early investors with astonishing profits. But they can fall just as quickly.
One of the biggest questions that people have about crypto is how exactly it gets its price. Unlock stocks and shares, the price of cryptocurrency isn’t tied to a balance sheet and a lot of the time, tokens are essentially worthless (I’m talking about meme coins here!)
Understanding how crypto gets its value is an essential part of making an informed investment decision. In this article, we’ll break down the key factors that influence the price of cryptocurrency, in simple terms that won’t make your head spin. We’ll take a look at what makes crypto go up and down, so you can feel more confident when navigating the crypto world.
- Supply and Demand
- Market Sentiment
- Competition
- Token Utility
- Social Media Trends
- How To Know If a Cryptocurrency Could Go Up?
- Why Do Some Cryptocurrencies Fail?
- Does The Economy Impact The Price of Crypto?
Supply and Demand
Supply and demand is nothing new. In fact, this concept is the foundation of any market, and cryptocurrency is no exception.
When there’s more demand for a particular cryptocurrency, and the supply is limited (as is the case with Bitcoin, for example), the price will naturally rise. This is because the more rarity something has, the more its perceived value will be.
On the flip side, if more people are selling than buying, or if the market is flooded with a cryptocurrency, the price can drop faster than you can say “blockchain.”
Take Bitcoin, for instance. There are only 21 million bitcoins that will ever be mined. As we get closer to that limit, demand often rises because people know that the supply is capped. This scarcity pushes prices up.
What can cause supply and demand changes?
The supply and demand of cryptocurrency can be influenced by several factors.
- New investors coming into the market and buying.
- Mass selling when people panic in response to news or economic events
- Mining rewards decreasing, like with Bitcoin halving events, which reduces how much new Bitcoin miners can earn.
Market Sentiment
Even in the world of digital assets and high-tech blockchains, human emotions play a big ole in price. Market sentiment is essentially how investors feel about the market, and in crypto, that can change very quickly.
When people are feeling optimistic, prices often rise because everyone’s buying in anticipation of future profits. On the other hand, when fear creeps in—due to regulations, a market crash, or a piece of bad news—people can start selling quickly, which can drive prices down.
The cryptocurrency market is volatile because it’s still relatively new compared to stocks or bonds. Therefore, investors can be swayed easily by news stories, social media trends, or even rumors.
This can lead to large price swings in a short period of time.
Competition
New projects enter the cryptocurrency market every day, and much like any industry, competition can have a major impact on the price of a cryptocurrency.
Take Ethereum, for example. As one of the largest cryptocurrencies, it has a lot of competitors such as Cardano, Polkadot, or Solana (these are also blockchain networks).
If a new blockchain comes along with faster speeds, lower fees, or new features that make Ethereum less appealing, people might start selling their Ether and buying the competitor’s token. This can cause Ethereum’s price to drop while the competitor’s token goes up.
However, competition doesn’t just drive prices down. In many cases, a new competitor in the market can create hype, which can drive prices up for both the established and new cryptocurrencies. Innovation excites investors and creates a positive sentiment.
Token Utility
The value of a cryptocurrency is also tied to how useful it is. This is called “token utility.” A token with strong utility will generally have more value because utility drives demand.
There are many different use cases for cryptocurrency. For example, coins can be used to power blockchain networks (such as Ethereum), used to access cryptocurrency games (such as MANA), or simply used as a means of payment (such as Dogecoin).
The more useful a token is, the more demand there is for it.
On the flip side, if a token doesn’t really serve a purpose, or if a project fails to deliver on its promises, investors may start losing interest, and its price could fall. Token utility is what gives a cryptocurrency long-term value, and without it, a coin may struggle to hold its price in the future.
Social Media Trends
We can’t talk about crypto price movements without mentioning social media. Whether we like it or not, platforms like Twitter (now X), Reddit, and TikTok can influence the crypto market in a big way.
Social media is a breeding ground for FOMO, where influencers, online communities, or even celebrities start hyping up a particular cryptocurrency. This causes everyone to start talking about it, and the price quickly goes up.
The reverse can also happen. If a negative rumor spreads on social media people can panic and sell off their holdings, causing the price to plummet.
The impact of social media trends on the price of cryptocurrencies is perhaps one of the riskiest aspects of the market. Sometimes, it takes just one social media for the price of a coin to fall (or rise!). One excellent example I can think of is the influence of Elon Musk’s tweets on the price of Dogecoin.
How To Know If a Cryptocurrency Could Go Up?
Now that we’ve covered the basics, you might be wondering how to tell if a cryptocurrency is about to take off?
While its impossible to predict the future, there are a few methods that can help you make more informed decisions.
Tokenomics
The first step is to take a look at the coin’s tokenomics. This refers to the economic factors surrounding a cryptocurrency.
This includes its supply, inflation rate, how tokens are distributed, and any mechanisms in place to reduce the circulating supply (like burning tokens). A project with strong tokenomics often has better long-term potential because the supply and demand dynamics are built to create value.
For example, Bitcoin’s capped supply is one of the reasons its value continues to rise over time. Other projects might have built-in burning mechanisms, where a portion of tokens is destroyed, reducing supply and increasing scarcity.
Technical Analysis
Many traders use technical analysis to predict where the price of a cryptocurrency might go based on past price movements. This involves looking at charts, patterns, and indicators to identify trends and potential entry or exit points.
While it’s not foolproof, technical analysis can help you understand the market’s mood and make more educated guesses about where the price is heading next.
However, it can be quite complex!
Sentiment Analysis
We already talked about market sentiment, but you can also measure it with tools designed to track how people feel about a particular cryptocurrency.
Sentiment analysis looks at the volume and tone of mentions on social media, news outlets, and other platforms to gauge whether people are feeling optimistic or pessimistic about the market.
Positive sentiment often leads to price increases, while negative sentiment can cause the price of a coin to go down. Keeping an eye on market sentiment can help you spot trends before they fully develop and take advantage of future movement.
Project Roadmap and News
The best cryptocurrencies have a solid roadmap – this is a timeline of future events that allow the project to maintain its value. Roadmaps keep investors interested and stop the crypto from falling off the face of the earth.
It’s a good idea to check a project’s roadmap and news updates to see if anything exciting is coming up. Big announcements like a new partnership, technology upgrade, or listing on a major crypto exchange can send the price of a cryptocurrency soaring.
Why Do Some Cryptocurrencies Fail?
Unfortunately, not every cryptocurrency will succeed. Some fail due to poor planning, lack of utility, or simply because they can’t compete with bigger players.
It is common for crypto projects to invest in huge marketing campaigns that make them look like the ‘next big thing’. However, a large majority of these coins fail, leaving investors who believed the hype struggling to regain their funds.
It is important to know how to spot a project that might be too good to be true.
Here are a few common reasons why cryptocurrencies fail:
- Poor tokenomics: If a project issues too many tokens without demand to match, the price will likely fall. Inflationary tokenomics can lead to oversupply, driving prices down.
- Lack of development: Projects that have no plans to expand or develop can lose investor interest.
- Scams or hacks: The crypto world isn’t immune to fraudsters. Scams, fraud, or security breaches can ruin a project’s reputation and drive investors away.
- Poor marketing: New projects should invest in marketing to generate awareness for their token. If a project fails to do this, it might not attract enough investors to push the price up.
- Lack of utility: If a coin can’t be used for anything, investors might not see a reason to buy it.
It is important to understand that the cryptocurrency market can come with a lot of surprises. The criteria above is based on historical trends however, it is not set in stone. Some coins may be able to flourish, despite showing all of the above warning signs.
Does The Economy Impact The Price of Crypto?
Despite popular belief, the broader economy can and does impact the price of cryptocurrency. In times of economic uncertainty, many investors turn to safe-haven assets like gold or government bonds. Cryptocurrencies, being a riskier asset class, might not be as popular because people don’t trust that their money will be safe.
On the other hand, when interest rates are low, or when there’s lots of money to spend, people are more likely to invest in riskier assets like crypto, driving up prices.
In recent times, we have also seen the price of cryptocurrencies being shaped by governments. Over in the US, the presidential election has had a monumental impact on the price of Bitcoin and many believe that a Trump victory could send Bitcoin to $100k.
This is because Trump is very ‘pro-Bitcoin’ and his win could be the beginning of better crypto regulations in the US.
Crypto prices can be unpredictable, but understanding the key factors that influence their movements can make it easier to conduct research before investing.
While it is impossible to predict the future, you can use the points outlined in the guide to make an informed assessment about whether the price of a coin could go up or down.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
Thank you for this Crypto article, I have to ask though, did the article mean “Unlock stocks and shares” or “Unlike stocks and shares”?