What Drives the Price of Cryptocurrency?
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Who decides how much a cryptocurrency is worth?
The short answer is: the market decides.
When we think about the price of cryptocurrency, we need to consider supply and demand. If there’s high demand, then buying pressure is likely to drive the price up. With little demand, prices may drop as selling pressure increases.
Any given cryptocurrency may be tradable on a number of independent crypto exchanges, each with its own supply and demand. For this reason, an asset may have slightly different prices between exchanges.
Savvy traders may be able to buy an asset at one price on an exchange, and if they’re quick enough, they can sell it for more on another platform. This is known as arbitrage.
These opportunities don’t last long and price gaps usually close fairly quickly.
However, if such trades are carried out in tandem with a solid risk management strategy, advanced traders can make significant profits using arbitrage.
What moves the crypto markets?
If prices are determined by supply and demand, what feeds that demand?
One prominent factor is news, be it current news, expected news or even rumors of news.
In general, the price of a cryptocurrency may go up when there’s bullish news about the asset or project. This news could be as simple as a greater number of stores accepting the asset as payment.
On the flipside, the price of a cryptocurrency can be hurt by bad news. In fact, the whole market can tumble on negative press, such as if a country suddenly announced a ban on crypto, which was a rumor we saw with China in 2017.
When there’s fear and panic, people start selling, and this can crash crypto markets.
A lot of the time, you can be better off not focusing on immediate price movement, depending on your strategy and goals. Look at the long-term picture and try and understand where crypto is heading.