What Affects The Cryptocurrency Market?

Last Updated July 23rd 2021
10 Min Read

Factors Affecting the Cryptocurrency Market

Understanding the Factors that Affect the Cryptocurrency price

Cryptocurrency, or any other asset, price is driven by various factors. The price movement depends on supply and demand in the market. But there are also other factors that influence the cryptocurrency price.

If you want to understand what affects the cryptocurrency market, this article is just for you. Here we’ll discuss the factors that affect cryptocurrency pricing.

What Affects the Crypto Market: Intro

The cryptocurrency market has changed the financial sector to a point of no return, offering people access to digital cash, fast cross-border transactions, and decentralised governance. Cryptocurrencies have made people wonder if we still need banks!

Given the potential of the cryptocurrency market, it’s no surprise that many investors have turned to cryptocurrency investing in order to diversify their portfolios and potentially increase their wealth.

Nevertheless, cryptocurrency doesn’t move in the same way as stocks and forex. Though there are some important similarities, cryptocurrency investing is a whole new sector.

There is a range of factors thrown into the mix that affect crypto prices, many of which are a lot more technical, including supply and demand, mining, internal governance, and crypto regulations.

Another key aspect to note about the crypto market is that when Bitcoin enters a downtrend, so do many other cryptocurrencies (particularly those similar in functionality). Or sometimes when Bitcoin loses value, traders move to other cryptocurrencies, which may go up.

The same can also be said for Ethereum and other cryptocurrencies that focus on the development of smart contracts and decentralised apps (dApps).

While there is a range of factors that may impact crypto trading, an important thing to remember is that the majority of the factors mentioned below cannot always be determined. Price predictions are speculative!

The only way to really estimate what direction a cryptocurrency may move in is by applying either fundamental or technical analysis, and stay up-to-date with crypto news, tech advancements, and market sentiment.

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Factors Affecting the Cryptocurrency Market

With thousands of cryptocurrencies in existence, understanding the crypto market can be a challenging task, especially for beginners. So here are some of the major factors that affect the cryptocurrency market.

What influences the price of cryptocurrency?

1. Updates to the code

One of the main factors that affect the cryptocurrency price is updates to the code. Why? 

Well, cryptocurrencies are constantly changing with new elements being added frequently. Usually, updates to the code are added to improve the performance of the cryptocurrency and enhance the adoption of decentralised finance globally. 

For example, Bitcoin being updated to add the lightning network is a huge change, as well as Ethereum transitioning from a proof-of-work algorithm to proof-of-stake.

Note that announcements can affect the price of a cryptocurrency as well, but what matters the most is when those changes are finally implemented and usable. 

If announced changes are not possible or do not work, this can result in investors losing faith in the project.

Bear in mind, if updates to the code were already expected, they might not affect the price of an asset. We all are anticipating the launch of Ethereum 2.0 with its proof-of-stake algorithm, wondering how it will impact Ethereum prices.

2. Supply and demand

Supply and demand is a crucial principle in the financial sector, particularly in crypto investing. This is a pretty straightforward factor to look out for; a factor that affects anything you trade (whether that is stocks, forex, or crypto).

If something is in short supply, its value will increase; if there is an abundance of something, the value is likely to decrease. It’s not a secret that the effect of supply and demand on inflation and deflation is significant.

The higher the demand and lower the supply, the higher the price of a crypto.

Here we should note that unlike fiat currencies, many cryptos have a limited supply. Hence, many claim that scarcity is a major force in the crypto market.

When it comes to scarcity, mining is also important because if a cryptocurrency has a limited supply, then that will also affect its supply and demand.

And let’s not forget about the process of halving. Cryptocurrencies may go through a halving, which is when a cryptocurrency reaches a certain number of blocks (or time that has passed) and subsequently, the block reward for each block is reduced. 

While there are different factors that affect supply and demand, crypto traders should look at volume because volume often precedes price movements.

3. Cost of production

Cost of production is another factor that affects the cryptocurrency market. The process of mining correlates not only with demand and supply but costs. 

When it comes to Bitcoin, for instance, we should mention that the process of extraction or mining becomes more and more complicated and costly, with an expected block time of 10 minutes.

Electricity consumption also raises some ecological concerns that may also affect crypto investing. Did you know that Bitcoin has almost the same energy consumption as Switzerland?

4. Scandals involving developers

Believe it or not, scandals involving developers also have a significant impact on the cryptocurrency market. 

And there is always drama in the cryptocurrency industry and plenty of mudslinging between projects.

One of the most well-known examples is with IOTA. IOTA’s chairman said that an independent security researcher ‘needed a slap’ after criticising the project. This then resulted in the University College London removing their support, which had a negative impact on IOTA with investors losing confidence.

Conversely, developers who are very busy promoting their projects can have a positive effect on their cryptocurrency. Justin Sun of Tron is one such example, though it should be mentioned that some of his announcements are also controversial.

5. Regulation

Perhaps one of the major factors affecting the cryptocurrency market is regulation. It’s not a secret that crypto regulations vary between countries and fall in some grey jurisdiction. 

As a result, crypto regulation is always changing - some see this fact as a good thing while others don’t. Regulation is actually better for traders as it provides some guarantee and security, with exchanges or ICOs less likely to simply disappear.

The USA and China are two of the biggest players when it comes to crypto regulation. The USA because most countries will follow their policies and China because there are many Chinese investors involved in cryptocurrency trading. 

And, of course, these two countries are two of the largest economies in the world.

While China has notably been stricter on cryptocurrencies, the USA is more concerned if cryptocurrencies are considered securities or commodities. Effectively, the USA is trying to bend cryptocurrency to fit into the regulation policies they already have instead of setting up new regulations.

One thing is for sure: regulatory announcements have a significant impact on the crypto market, too. The truth is that if requirements introduced by national authorities become more restrictive, crypto prices may fall.

As time goes by, it is likely that regulation will become a larger factor. When this will happen is yet to be seen - simply because legal practices are still trying to keep up with tech developments.

Note that it is possible that when Facebook’s Libra is finally launched, regulation may become crucial - simply because Libra may give access to cryptocurrency to millions of people. 

After all, cryptos are no longer reserved for tech-insiders and big investors but ordinary people.

6. Utility

In the crypto market, utility correlates with prices. By this, we mean how you can use the cryptocurrency aside from paying for products and services.

To have some utility value, a token must have a well-defined purpose, a specific role in its ecosystem, and effective features; in other words, its value comes from the functions it has. That may be related to smart contracts or dApps, for instance!

Two great examples of a utility token are Binance Coin and LEO, which can be used on the Binance exchange and Bitfinex exchange, respectively, to get a discount.

Utility can also cover other properties as well, such as practical use.

One example could be stablecoins, such as Tether, which was designed to be tied to the US dollar to reduce risks. To put it simply, traders can use Tether to hedge their trade when the market is too volatile to trade.

7. Whale investors

The influence that whale investors have on the crypto market is evident. Here we should note whale investors are investors with a very large amount of capital. They can either be individuals or, more likely, large institutions.

Whale investors can affect the market either by investing a large sum in the market or selling a large amount.

It is hard to predict when whales will get involved in the market. They have their own trading goals and what might seem like a high rate to buy at for normal traders may seem like not much to them.

Whale involvement in the market can signify the mood on a certain cryptocurrency. If whales are buying, it may signify that they believe the market will go up. If they sell, it may mean that they believe the market will go down.

You have to remember that whales often have a good deal of resources at their disposal and can see the market better than you. 

At the same, whales can speculate and intentionally buy and sell large amounts to cause short-term swings and shake the crypto market.

All you can do with whale investors is to react and take their actions into consideration when trading cryptos.

Have you considered investing in the Crypto market?

8. Market news 

Since the power of the media is evident, it’s no surprise that market news is a major factor that can affect the cryptocurrency market. 

In fact, market news is the number one thing to watch when it comes to cryptocurrency trading - a factor that can include anything in this list. 

News drive moods among crypto investors; they can increase demand or cause panic.

News about political events can also push people to trade cryptocurrency. For example, if the US dollar is down, people may trade Bitcoin if there is a positive movement. 

Also, if the economy is bad, investors may move more money into cryptocurrency. Simply look out for key indicators that the economy may be bad or good, such as employment and Gross Domestic Product (GDP) rates.

As stated above, market news should be one of the primary things you check daily when trading cryptocurrency.

On top of that, let’s not forget that media can be used to educate traders about cryptocurrencies and enhance people’s desire to own cryptos.

9. Competition

Competition is another factor that has a strong influence on the crypto market. When a new cryptocurrency appears on the scene - a cryptocurrency that attempts to do something similar to ones that already exist - this can drive up prices.

There are plenty of instances of cryptocurrencies offering improved solutions to existing projects. For example, Ethereum and EOS are both competing for smart contracts and dApps dominance.

There are also a few cryptocurrencies now offering privacy solutions like Monero, Dash, and Zcash.

A new cryptocurrency may offer new features and be marketed better than what already exists, which may increase its price and undermine its rivals. If it is found out to be true that one is better than another, people will likely move over to the alternative.

In fact, the way a coin is marketed is crucial. Unfortunately, there are many undervalued coins with great potential that haven’t had a chance to make a name for themselves in the crypto sector. Some interesting coins are Polkadot, Enjin, and Fusion.

Talking about new coins, let’s not forget that Initial Coin Offerings (ICOs) are constantly happening due to low barriers of entry, so competition may keep prices down.

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10. Hard forks

Even if you are a newbie, perhaps you won’t be surprised to hear that hard forks do affect the crypto market. A hard fork is when a blockchain is split into two - an event that is often triggered by an internal conflict among developers and miners.

Of course, it does depend on how much drama there is in relation to the hard fork; sometimes there is a lot and sometimes there isn’t. 

In most cases, the history before the fork is the same, but after the fork, the two blockchains may go in different directions in how they are developed.

The issue of scalability is a major pain point in the crypto sector, for instance. One of the biggest examples of a scandalous hard fork is Bitcoin and Bitcoin Cash, and then Bitcoin Cash and Bitcoin SV. But even before that - Ethereum and Ethereum Classic!

Not all hard forks are dramatic, though. Many go on with little drama if they develop themselves. Dash and Litecoin are the results of hard forks and have not seen the same drama.

11. Adoption

Adoption is often seen as the most important factor that cryptocurrency needs in order to move forward and replace fiat currency.

It’s not a secret that Bitcoin is the most accepted crypto and the most popular one in terms of market cap. However, adoption is happening with other cryptocurrencies as well and should not be overlooked.

Adoption is also important in regards to smart contracts and dApps as well, which represent entirely different industries. Actually, dApps are more likely to be adopted sooner. And there are plenty of dApps built on top of Ethereum!

As a matter of fact, blockchain technology is already being adopted in different sectors, beyond finance, such as gaming, medicine, and music.

Smart contracts may take longer to be adopted, but if they are employed in real-life settings by lawyers and other organisations, they could improve crypto prices.

No surprise that Ethereum, EOS, NEO, and many other cryptos are fighting for dominance, making investors wonder if Ethereum will continue to be the king of smart contracts in the crypto market.

12. Availability

 Availability is another factor that can influence the cryptocurrency sector. If a cryptocurrency is easy to get on an exchange then that will have a positive effect on the price, especially if the coin is listed on a popular exchange.

The more popular the exchange, the more participants it gets.

eToro, for instance, is one of the leaders in the sector and allows investors to buy assets and also trade Contract for Difference (CFDs) of up to +90 pairs.

The same is also true if cryptocurrencies are accepted by CFD brokers, which may have a much wider reach within traders compared to cryptocurrency exchanges. While crypto regulations are still a grey area, CFDs allow traders who can’t afford to buy actual cryptos - particularly Bitcoin -  to access the crypto market.

Bitcoin is, in fact, an underlying asset in exchange-traded funds, futures, and other products.

Availability of cryptocurrency wallets will have a positive effect as well. If a new cryptocurrency becomes available on a popular wallet, its price will likely rise.

Additionally, the number of ATMs, retailers, and facilities that accept cryptocurrencies is crucial to determine real use and availability, which can push up prices and adoption.

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13. Security problems

Security problems are among the major factors that impact the crypto market.

Unfortunately, hacking and fraud are still a problem for crypto investors. This, of course, is not a good thing to happen. 

Cryptocurrency is supposed to be more secure than regular transactions and when this fails, people realise the crypto market might not be as secure as imagined.

One of the biggest attacks of recent times was the notorious Ethereum DAO hack; when a hacker realised they could keep withdrawing from the DAO (Decentralised Autonomous Organisation) significant amounts of money.

While it wasn’t necessarily an attack on Ethereum, it didn’t help its image and led to Ethereum being forked into Ethereum and Ethereum Classic. This was done to reverse the hack and give people back their tokens. 

Note that Ethereum Classic uses the old blockchain where the hack still occurred.

Potential security bugs can also be a problem as well because they may signify that something wasn’t coded properly and that hacks may happen in the future.

Hacks on exchanges have also been devastating and not helped the image of cryptocurrencies. The biggest Bitcoin hack ever was the attack on the Mt. Gox exchange.

Note that hacks often provoke a price crash. An example is the notorious attack on the Binance Exchange that caused a 10.8 pc crash.

Last but not least, the use of coins for illicit activities also has a negative effect and murk the crypto market.

14. Market sentiment

Market sentiment is another important factor that can help a coin to establish its dominance. Note that market sentiment refers to the overall attitude of investors toward an asset or a market.

It’s also the crowd psychology surrounding a given investment.

While some coins have caused controversy worldwide, there are many coins with promising features that are becoming more and more popular, with prices increasing despite the ongoing pandemic.

Take Tezos, for instance. Despite the numerous feuds surrounding this innovative coin, Tezos managed to gain the trust of investors with its democratic governance and is now one of the fastest-growing cryptos in the market.

15. Financial crises

Just like other investments, the cryptocurrency market is affected by financial crises, health concerns, and social turmoil.

In fact, economic crises have a strong impact on crypto prices. If traditional financial systems collapse, people may panic and invest in alternative assets. The more people invest in crypto, the larger its capitalisation.

When investors lose confidence not only in fiat money but governments, then many may turn to the crypto market, which will push up prices even further.

Some even claim that despite the high volatility levels in the crypto sector, cryptocurrencies may outperform gold as a safe haven asset.

Key Points

If you remember anything from this article, make it these key points:

  • There are many factors that can affect the price of a cryptocurrency. By understanding what they are, you can trade more effectively.
  • crypto pricing is influenced by factors such as: the supply of the crypto and the market demand for it.
  • Always keep an eye on the crypto news. This is where you will hear about events that can affect cryptocurrency prices.
  • Technical factors along with market sentiment are unique elements to cryptocurrency. They can indicate how certain cryptos work and compare with their rivals, which can affect prices.
  • Availability and adoption are by far the biggest factors that influence the crypto market. The more people use cryptocurrency, the more valuable it will become.

If you enjoyed reading our article What Affects the Cryptocurrency Market. Understanding the Factors that Affect the Crypto Market, please give it a like and share it with anyone else you think it may be of interest too.

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