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Explained: How Cryptocurrency Prices Work

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How do cryptocurrency prices compare to fiat currencies?

Nothing with an underlying value or a commodity like gold serves as backing for either.

The greatest distinction between digital currency values and government issued currency is that government issued types of money are supported by focal state run administrations and proclaimed as lawful delicate.

 The fact that the central government has stated that it has value and that two parties to a transaction have placed their trust in that value is essentially what gives it its value.

Today, the majority of nations use a fiat currency system in which monetary reserves and central banks control the money supply and, as a result, indirectly control inflation.

On the other hand, most countries do not recognize cryptocurrencies as legal tender because they are not governed by a central authority. Additionally, the supply of cryptocurrencies will typically be fixed, making inflation-induced devaluation of cryptocurrencies virtually nonexistent.

Aside from that, the values of cryptocurrencies and fiat currencies are supported by similar characteristics. Both methods have a relative value store and can be used as a medium of exchange to purchase goods and services.

Why do cryptocurrency prices fluctuate so widely?

This is still a young market.

The cryptocurrency market is still considered to be in its infancy, and most people have only heard the term “cryptocurrency” once.

There are a number of characteristics that make emerging markets inherently volatile.

When compared to more established markets like traditional economies and the foreign exchange market, the market has limited liquidity. To put things in perspective, the total value of all the money in the world is more than $90 trillion, but the total market cap of all cryptocurrencies is only about $250 billion, or a difference of 36,000 percent.

Daily forex trades are closer to $5 trillion, while daily cryptocurrency trading volumes are around $14 billion. On foreign currency trades, the spread—the difference between the buy and sell prices—will typically not exceed a few pennies, whereas spreads on cryptocurrency trades may exceed a few dollars.

All of this points to a very small market that moves quickly and makes cryptocurrency prices more volatile.

Every day, a large number of new adopters also enter the market. Toward the start of 2018, cryptographic money trades revealed that they were adding 100,000 new clients consistently. The market’s disruptive nature and volatility are exacerbated by the fact that many of these members will have a significant stake in the cryptocurrency price rising or falling.

Finally, emerging markets may be rife with price manipulation. The majority of the flow of cryptocurrencies is controlled by central exchanges, which gives them a lot of incentive to artificially manipulate cryptocurrency prices to increase revenue. 

By manipulating the price feeds that are displayed on exchanges and causing traders to either buy or sell, this is one way they can accomplish this.

When you add thousands of new market participants who are easy to take advantage of, the effect of this kind of manipulation gets even worse. In unregulated markets, price manipulations can also be difficult to demonstrate and control.

Focal trades likewise give a weak link. They manage and store a lot of cryptocurrency, so if they get hacked, the price of cryptocurrencies could go up a lot.

What factors have the greatest impact on cryptocurrency prices?

The most significant factor in determining cryptocurrency prices is supply and demand.

This is a fundamental economic idea. The value of a cryptocurrency will decrease if there is a large token supply but little demand from users and traders. On the other hand, the value of a cryptocurrency will rise if there is a limited supply and high demand for it.

This is one of the reasons why the price of Bitcoin reached its highest point, and it has to do with the scarcity factor that drives up prices. In comparison to other tokens, Bitcoin’s supply is limited to 21 million BTC, but demand has skyrocketed in recent years.

The price of cryptocurrencies is also heavily influenced by public opinion and the media. The price of a token or platform typically declines when it receives negative press. However, the price would almost certainly rise if the same coin received favorable media coverage and prominent support. This indicates that hype and human emotion have a significant impact on prices.

The level of token utility—that is, how useful the token is—and the underlying blockchain platform in solving a real-world problem are two other factors that have a significant impact on the price. In addition, the mining difficulty of proof-of-work (PoW) tokens may also have an impact on the value—that is, a higher mining difficulty would make it more challenging to increase the supply of the coin and exert upward pressure on the price when demand is high.

What has changed in the price of cryptocurrencies over the past 18 months?

We can get a good idea of how the cryptocurrency market as a whole has developed over the past 18 months by following the price of Bitcoin.

When China announced that it would investigate cryptocurrency exchanges in the country, Bitcoin fell below $1,000 at the beginning of 2017. The majority of Bitcoin trading took place in China at that time, and the cryptocurrency market cap was close to $15 billion at the time. As a result, the price of Bitcoin fell to lows of approximately $775.

After a brief recovery to well over $1,000 in March 2017, when the SEC denied approval for a Bitcoin ETF, Bitcoin fell back below $1,000. Within two days, the total market cap decreased by $5 billion.

As a result of Japan’s legalization of Bitcoin in April 2017, its value increased once more to over $1,000. At that point, the total market cap for cryptocurrencies was approximately $26 billion.

Bitcoin steadily increased close to $3,000 from April 2017 to July 2017, while the overall market cap exceeded $100 billion. However, when the Bitcoin/Bitcoin Cash split occurred in mid-July 2017, the price plummeted to below $2,000 in a matter of days.

By the end of August 2017, Bitcoin had recovered to almost $5,000, and the market value of all cryptocurrencies was close to $170 billion.

However, on September 4, China famously prohibited ICOs. However, the move caused a much smaller correction than anticipated. By the middle of September 2017, Bitcoin had fallen to around $3,300, but it quickly recovered and reached well over $4,000 by the end of the month. At this point, the cryptocurrency market cap was just shy of $150 billion.

The Bitcoin price really accelerated from here. It had surpassed the $6,000 mark by the end of October 2017 and stood at just under $10,000 per BTC at the end of November 2017.

It reached highs of about $20,000 in the middle of December 2017, but it ended the year around $15,000, with a market cap of about $235 billion.

The price of Bitcoin had fallen back to around $10,000 by the end of January 2018 and had fallen to $6,000 in February.

In February 2018, we saw Bitcoin push back up past $11,000 and the general market cap recuperating to around $500 billion — subsequent to arriving at lows of around $300 billion prior in the month.

The price of Bitcoin has been on a steady downward trend ever since, despite occasional, brief recoveries, despite discussions of increased regulation across the various markets and other bumps, such as Google’s ban on crypto ads. The total market capitalization of all cryptocurrencies has remained stable at approximately $250 billion as of the beginning of July 2018. Bitcoin is currently trading around the $6,000 mark.

How accurate are price predictions for cryptocurrencies?

How accurate are price predictions for cryptocurrencies?

When it comes to forecasting the cryptocurrency market’s future prices, there are no guarantees, just like there are with traditional markets.

On both ends of the price prediction scale, those who have attempted to make predictions for 2018 and beyond border on the extreme.

John McAfee (of McAfee Associates), Jim Cramer of CNBC, and Bobby Lee (CEO of BTCC Exchange) are among those who have predicted that Bitcoin will surpass $1 million.

Tom Lee, the former chief U.S. equity strategist at JP Morgan and the current managing partner at Fundstrat, predicted a price of $25,000 by the end of 2018 and $125,000 by 2022, among other more moderate but still relevantly high price predictions.

Robert Sluymer, additionally from Fundstrat, put Bitcoin at not a lot higher than $7,000. According to Llew Claasen, the executive director of the Bitcoin Foundation, the price of a Bitcoin will reach $40,000.

On the other end of the spectrum are predictions ranging from partial to complete market collapse. GP Bullhound, a small investment bank, says that within the next year, the market will fall by 90%, and Harvard professor and former IMF chief Kenneth Rogoff says that Bitcoin will fall to $100. GoldMoney Inc. CEO Roy Sebag predicted that Bitcoin will never be worth anything.

Although it is abundantly clear that predictions regarding the price of cryptocurrencies should be taken with a grain of salt, there are a few things to keep an eye out for that will almost certainly have an effect on the price of Bitcoin in the future as well as the market for cryptocurrencies in general. This comprises:

  • The extent and nature of regulations in the dominant cryptocurrency markets;
  • The rate of adoption of cryptocurrencies in the upcoming year and beyond;
  • The rate of growth in the cryptocurrency futures market;
  •  The utility of tokens and the capacity of the underlying technology to address real-world issues
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