Cryptocurrency has always been in the news because of its volatile nature. When we think about cryptocurrency, its volatility is the first topic that comes to mind. The most common question here is, what causes bitcoin and other cryptocurrencies to fluctuate. While making investments, investors find it extremely difficult to gauge cryptocurrency prices’ movement. Cryptocurrencies are at a nascent stage; still, the features of cryptocurrency attract investors. Some of the features are as follows:
- No Permission Required
- Fast Transaction
- Global Reach
- Decentralized Currency
Nevertheless, the value of the currency fluctuates due to various factors, some of which are below:
- Supply and demand- A cryptocoin needs to have a high utility. In order to stay on the market, cryptocurrencies need to have a strong use case. Cryptocurrencies have limited supply, so the value increases over time with demand. It creates a scarcity of coins which increases the value of the currency.
- Cost of production- People mine cryptocurrencies with the help of a complex computer system that verifies the next block on the blockchain. There is a network of miners that work to extract cryptocurrencies. The entire process is decentralized as there is no interference from the government or financial institutions. The miners are rewarded in cryptocurrency tokens and paid by the exchanging parties. Many young people earn a great deal of money through mining cryptocurrency.
However, the miners need to invest in expensive equipment and electricity to start mining. It is a complex process, but the reward is worth it. In addition, there are complex math problems that the miners need to compete with each other to solve to verify the block. As the mining costs increase with time, so does the cost of the cryptocurrency. So, if the price of the digital currency is not high enough to cover the cost of production, miners may not mine the coin at all. Therefore, the cost of production influences the people investing in the currency.
- Availability on exchanges- Numerous people invest in bitcoin and Etherium. However, many small tokens are not very popular and are unavailable on crypto trading platforms. Thus, there is limited access for investors. However, if cryptocurrency gets listed on more exchanges, there will be more investment in the coin, increasing the currency’s value.
- Competition- A score of cryptocurrencies is available, with new tokens launching every day. Although it is easy to get into the game, it isn’t easy to form a network of users. An efficient application on the blockchain can be a great way to build a network. When a cryptocurrency gains momentum, its existing value increases. The competitors’ prices go down, and the new currency’s value has gained momentum. Thus, the competition’s performance has a significant impact on cryptocurrency prices. Investors invest in bitcoins and other currencies depending on the competitors’ performance.
- Governance- Cryptocurrency investors prefer altcoins with a stable regime that they can understand. When cryptocurrency management is sound, the value is likely to rise as the stakeholders find themselves in an advantageous position.
Thus, when we observe fluctuation in the price of the cryptocurrency, there are a lot of factors that might be accountable for the instability. However, the high return on investment attracts millions of investors towards crypto investing.