Investing in an Idea: The Mechanics Behind the Price of Your Cryptocurrency Investment
When it comes to investing, there are often two things that investors have in mind: security and growth. As a general rule, those who are opting for security will choose investments with a proven track record and a more stable price point that could result in growth over time or help them to better store their money. For example, an investor could choose to invest in government bonds to slowly grow and protect their money or they could choose to invest in precious metals, which often retain their value and have a practical application in the real world.
On the other end of the spectrum, we have investments that are less secure but offer the volatility necessary for investors to make money and to do so faster. One such great example of this kind of asset is cryptocurrency as it is a highly volatile investment that, while it has lost people money, has made billionaires out of those investing smaller amounts as well.
However, what many people fail to realize is that investing in cryptocurrency is not the same as investing in a traditional asset. Investing in cryptocurrency is more like investing in an idea and this is why we see such extreme price swings from cryptocurrencies on a near-daily basis. If you’re curious as to what truly drives the price of this digital asset, here are some of the main factors that are behind the price of your cryptocurrency investment.
Supply and Demand
The biggest driving force behind the price of cryptocurrency is supply and demand. Although some cryptocurrency projects have an unlimited number of tokens that could be produced, allowing for more to be made in the event that their demand increases, many original cryptocurrency projects and subsequent ones were made with a total overall limit of coins that could be mined or acquired through other means. In theory, this limited number of available coins should allow for a higher price point to be maintained when demand increases for a given coin. However, this depends entirely on the performance of the coin or token and many of the other factors that contribute to the price of the digital asset.
Speculation and Adoption
As we stated at the beginning of the article, investing in a cryptocurrency is more like investing in an idea. In order for a cryptocurrency to thrive and to be able to increase its price, it must first be able to prove that it can be applied to real-world situations and provide value in an industry that is not oversaturated due to similar products and offerings. Then, the project must be able to attract enough users who will adopt it so that there can be enough demand to drive the price upwards. Should the project fail to do either of these or attract only a small amount of attention, the price will continue to remain low. A cryptocurrency is, overall, given its value based on what people think it is worth.
Regulations and Media
For those who are regularly involved with the trading of cryptocurrencies, you are most likely aware of the impact that developing news can have on a digital asset and for good reason. Changes in the cryptocurrency such as government regulations, major companies or institutions investing in cryptocurrency or blockchain, or changes in existing cryptocurrency products are all news pieces that could greatly impact the price of a cryptocurrency for worse or for better. While it is highly dependent upon the developments themselves, major changes to price could occur at a moment’s notice due to these changes alone in the industry.
The Price of Bitcoin
Make no mistake, you are not going to find an asset that is performing well on its own without being affected by other sectors of the cryptocurrency market. At the current moment and for the foreseeable future, Bitcoin is the most popular of these coins and other coins or tokens tend to follow along with the financial health of the leader. When Bitcoin’s price rises, the price of other digital assets will typically rise as well. When Bitcoin’s price falls, others will fall too. It is important to watch the price of Bitcoin as you will quickly take note of the staggering effect it has on the rest of the market.
The volatility of cryptocurrency can make it an attractive asset for some investors but it is vital to know the causes behind this volatility to better understand your chosen asset and what you will need to look for in order to protect your investment. If you are just learning about cryptocurrencies or are looking into investing in a few, use the brief guide above as a reference to gain further insight into how your digital asset functions and what factors have the potential to impact its performance.