Given just how popular cryptocurrency trading is today, one would be forgiven for thinking that price predictions and corrections were art that could somehow be learned.
Today, investors and traders make price predictions and speculations with the conviction of a scientist experimenting with the phenomena of gravity- the sure knowledge that everything that goes up will surely come down.
However, this is not the case with cryptocurrency investing, as several factors, hidden and overt, combine to determine the price of a cryptocurrency token. It is not an exact art, and much more guesswork is involved than one would imagine.
Nevertheless, there are some predictable patterns to be observed as regards price movements. And a thorough study of this can create a somewhat workable formula to make the best of trading.
In this article, you’ll learn all about these patterns and how they work dynamically to determine the price and value of a cryptocurrency token. But first, let’s delve into the origins and basics of cryptocurrency itself, as this knowledge is crucial to understanding the “rocket science” that is cryptocurrency price movements.
Read on!
What is cryptocurrency?
Cryptocurrency is typically decentralized digital money designed to be used over the internet. It has been called by some “internet money” because it is a form of digital cryptographic currency.
Crypto, as it is popularly called, was designed to work as a medium of exchange through a computer without the relevance of any central authority. Thus, it is essential to note that there is no government or bank to control or maintain it centrally because it is secured cryptographically and is almost impossible to counterfeit or double-spend.
Origins of cryptocurrency
The concept of digital currency gained traction in the 90s tech boom. Organizations and programmers ventured to create a parallel line of currency that would be out of any central authority’s reach.
Ironically, the companies that tried to make this digital currency themselves assumed the authority of verifying and facilitating transactions, which not only defeated the purpose but also founded the venture.
For a long time, the idea of digital currency lost cause until Satoshi Nakamoto – a programmer or a group of programmers introduced and explained Bitcoin in 2009, the first-ever cryptocurrency.
How does crypto work?
Cryptocurrencies are transactions or records in a shared ledger that can only be changed upon specific prerequisites.
Transactions are initiated via public and private keys, with both working in tandem the way a bank account number and ATM pin would, respectively. Once the transaction is confirmed via the consensus protocol, it reflects across all the nodes in the network as the shared ledger is updated to reflect it.
Blockchain networks power cryptocurrencies.
The public digital ledger consists of records called blocks. They are used to record transactions across many computers, so any involved block cannot be altered retroactively without altering all subsequent blocks.
Types of crypto
There are several kinds of cryptocurrency tokens, each varying based on their application, use case, and function.
Utility tokens
These are thought of as coupons or vouchers but are, in reality, digital units representing a value on the blockchain. In other words, they are tokens used to provide specific access to a product or service run or operated by the token issuer.
Security Tokens
These securitized cryptocurrencies derive value from an external asset that can be traded under a financial regulation as security.
In addition, they are used for securitized tokenization of properties, bonds, stocks, real estate, and other real-world currencies.
Just as well, they often represent a stake in stock or equity and the right to the dividend in the asset represented. Which are further subdivided into
Equity tokens
These are similar to traditional stocks in form and operation, except that the ownership and transference happen digitally.
Asset-backed tokens
These are a category of cryptocurrencies whose underlying value is backed by a real-world asset. They are used to represent and trade value for these underlying assets. Most of them are used as blockchain-based security tokens.
Uses of cryptocurrency
Notwithstanding the gained popularity over the years, cryptocurrency is still nowhere near replacing institutionalized cash but has found wide acceptance across the world and can be used in the following ways:
As a mode of payment to merchants
Several merchants worldwide like restaurants, flights, jewelers, and apps have to accept it as a viable payment medium.
Investment
Crypto is one of the most popular forms of investment today. Many people globally have landed fortunes in recent years from smart trading and early investment in successful projects like Bitcoin and Ethereum.
Of course, for every intelligent, foresighted investor, there are at least ten unfortunate ones who have lost hundreds of thousands of dollars in failed schemes.
Nevertheless, it cannot be understated as a solid form of investment given the dynamic manner in which its value appreciates over time.
An alternative source of wealth
Cryptocurrencies behave like a secured alternative store of wealth, which is censorship resistant. This means only authorized people with private keys can access wallets, unlike traditional banks.
Since they are tradable assets, much like stocks, their price is determined by how much interest there is on the market in buying them.
Since cryptocurrencies are digital, some believe they shouldn’t be worth anything. Thankfully that’s not how the pricing works.
Pricing is usually determined by how much interest there is on the market in buying them, which can be called “demand,” and how much is available to be purchased, which is “supply” the relationship between these two determines the price. However, some other factors also affect the value and price of cryptocurrencies which are:
Cryptocurrency node count
Node count refers to the total number of active wallets within the blockchain network. It is a good indicator of the value of a cryptocurrency. It also shows how strong a cryptocurrency community is.
More nodes mean more vital communities.
Level of token utility
This means how useful the token is. A high level of utility will see the token’s value go up, increasing the demand for that cryptocurrency, which will, in turn, raise the price.
Mass adoption
If more people invest in a cryptocoin, its value can shoot through the roof.
Similarly, if fewer people invest, there will be a stagnancy in its value which would cause a reduction in the use of the token and a price drop. This can be monitored using a coin price tracker.
Inherent price volatility
New crypto projects are notoriously volatile, with sharp price changes often a common theme in the first few weeks and months of a launch.
New markets have qualities that make them inherently volatile. Some whale accounts hold many cryptocurrency coins and tend to influence the market to book profits.
Scandals
Incidents like hacking severe attacks, or when a new token becomes commonly known as a scam, its demand can drop sharply, and the price of the cryptocurrency could decline more quickly as many traders and miners would want to realize the profits that they have made already hence dropping the token’s value lower.
Regulation
Chances for regulation by the government are very high once the cryptocurrency has gone mainstream bear in mind that these regulations could lead the crypto to become more centralized, and this would have a significant impact on the price of a cryptocurrency.
Innovation
The more innovative a project is, the more likely it is to gain the favor of investors from early on. Suppose the developers and brains behind a cryptocurrency project are keen on steadily delivering new features, breaking the industry’s bounds. In that case, it is near-certain that the demand for such a cryptocurrency will increase, driving its price upward.
On the other hand, a project that lacks sufficient innovation and offers nothing beyond what already exists in the market will sharply decline its price value.
Pumping and dumping
Cryptocurrency prices are also strongly affected by the laws of demand and supply. That is to say that prices go up when the supply is low and downward when the demand is high. It’s possible to create scarcity and profit from increased demand artificially.
Since one person does not determine the market, it will take a robust and concerted effort from many investors, particularly ones with considerable digital assets, to create the required ripple effect across different exchange platforms.
The resulting price action is referred to as “pump and dump,” with the engineers of the scenario quick to “pump” coins to reduce the price and “dump,” as it were, to cash in.
Conclusion
Another essential yet underrated factor determining crypto’s price is production cost. Blockchains with a proof-of-work consensus mechanism validate transactions via mining, an expensive process involving purchasing and maintaining power-intensive computer GPUs and rigs.
Although not all blockchains run this protocol, mining is still essential in determining the price of crypto. Nevertheless, future innovations will see the likes of Ethereum and other altcoins follow a less energy-intensive protocol.
In the meantime, crypto continues to be volatile. Invest wisely!
