The traditional currencies like the US dollar or the UK pound are supported by a commodity such as gold and their prices are usually determined by the fundamental rule of trading: supply-demand. Their value is somewhat fictitious because it was derived by the government’s declaration that it holds value and the two independent parties were ready to trust that value. The government declares that currencies have value, and participants in transactions believe it.
On the other hand, cryptocurrencies are not regulated and are open to all trades. The supply of each coin is different. Some have a set number of coins, while others change the quantity. Inflation is therefore non-existent. Cryptocurrencies are not backed up by any goods, yet their prices fluctuate all the time.
How is the value of cryptocurrency determined? And how can we forecast future changes? These are just a few of the possible factors to consider.
The New Market
Although cryptocurrency is still in its infancy, many are not even familiar with the basics. Extreme swings, major spikes and drops are common in new markets. The liquidity available on cryptocurrency markets is much lower than traditional currency exchanges. The daily trading volume of cryptocurrency is around $14 billion. However, the total forex trading is $5 trillion. This gives an idea of the size of the crypto market.
The number of users
Every day, cryptocurrency exchanges saw an influx of 100,000 users. They all came to trade, buy or sell coins. This can lead to huge market changes that cause the price of cryptos to fluctuate depending on whether new users are selling or buying them. The prices of cryptocurrency are susceptible to cyber-scams. These scams can make it appear that new users are buying or selling non-existent coins. Imagine hundreds of thousands buying coins simultaneously at an outrageously high price. This will cause a spike in the prices of other currencies, and thereby affect the balance of the exchange.
Supply and Demand
Open markets have another problem: all coins can be manipulated. The flow of cryptocurrencies is controlled centrally by the exchange. This allows for growth and manages the value. The central exchanges store large amounts of coins that could be hacked and bring down the entire market.
The basic principle of economics, supply and demand, is the same for cryptocurrencies. Prices will fall if there is a lot of coins and not enough demand. The value will rise if there is a shortage of coins and the demand is rising. Bitcoin is an example. The supply of Bitcoin is limited at $21 million. However, the demand has increased over time which has led to an increase in the price.
The media hype
Public perceptions of cryptocurrency were and are influenced by the public image. The media coverage that favors one product or coin will have a positive impact on the price of cryptocurrencies. If the public doesn’t support digital money, then the value of cryptocurrencies will plummet. The key instrument that can hype up or destroy a new technology is the speculator. They only have to influence the image of the product and service.
More and more retailers and small businesses are now accepting cryptocurrency as a method of payment. This has increased the utility of coins, which in turn, has boosted their value. Mining cryptocurrencies became more difficult, resulting in a limited supply of coins. These changes led to a rise in the price of coins.
Predicted prices
It is extremely inefficient to predict the movements of the open and free market. Although market exchanges are known for being unstable, we have seen some unusual correlations over the past months, such as the one between the prices of gold and Bitcoin. The value of Bitcoin and gold has both increased since July 2022. The theory was that the USD took a plunge and people began investing in more stable goods. In response to the higher demand, prices began to rise.
Can we make any reasonable predictions about the future value and growth of cryptocurrencies? Wall St. has seen some great entrepreneurs and minds. These forecasts, such as Bitcoin reaching $1 million, are not a surprise. Others were more pessimistic, stating that prices will fall free and eventually bring cryptocurrencies to the ground. This supports the claim that no currency is able to survive on the market unless it has some tangible backing.
Let’s move on to some more realistic predictions that Bitcoin will reach $14,000 by 2022. This is due to the fact that investors have started buying the cryptocurrency without the intention of trading or selling it. The coins are still owned by the same people who bought them. This led to a decrease in the supply and a rise in the price. After taking the plunge in March, coins have recovered in record times. This has increased trust in digital currencies.
Each forecast should be viewed with caution. If you pay attention to the movements of the market and take into account all these factors, it is possible to predict where the price will go. In order to reduce the price swings, regulations will eventually have to be placed on the open market.