What Determines the Price of Crypto?
Wondering why Bitcoin prices change? We’re looking at how crypto prices work, what factors determine the price of crypto, and why crypto prices fluctuate. 📈
How do cryptocurrency prices work?
The price of cryptocurrencies - whether that's Bitcoin, Ethereum, or any other altcoin - is determined by supply and demand. Put simply, the price of a given cryptocurrency is determined by how much interest there is in the market to buy (demand) as well as how much is available to buy (supply).
If there is a high demand, but low supply, the price goes up. If there is a low demand, but a high supply, the price goes down. It's this relationship between the two that determines the price of cryptocurrencies.
Cryptocurrencies aren't unique in this sense. Many other markets with tradeable assets like stocks, commodities, and securities also have prices determined by supply and demand.
While supply and demand are the two key factors that determine the price of a cryptocurrency, there are however a range of other factors that may influence supply and demand - like utility, mass adoption, tokenomics, and market sentiment, all of which we'll explore in this guide.
How do cryptocurrency prices compare to fiat currencies?
Many people assume fiat currency is backed by another value - but this hasn't been the case since the early 1970s. Neither cryptocurrency nor fiat currency values are backed by a commodity like gold - with the exception of pegged cryptocurrency assets that may be pegged to the value of another asset.
The biggest difference between crypto and fiat values is that fiat currencies are declared legal tender and backed by central governments and banks. Fiat currency value is controlled through the supply of money, supposedly stopping inflation. While crypto is not controlled by a central government or bank, nor recognized as a legal tender in almost all countries. Many cryptocurrencies have a fixed total supply to avoid devaluation through inflation.
How does supply and demand impact the price of crypto?
At the time of writing, Bitcoin has traded at $68,000 at its highest and $0.04865 at its lowest - but why has it changed so drastically? It’s easier to understand how supply and demand impact the price of crypto with an example.
Let's say one whale sells off their BTC holdings. The market is suddenly flooded with BTC, so there is a high supply. If there isn’t an equally high demand, the price of BTC will drop.
In the reverse scenario, let’s say a whale wants to buy a significant amount of BTC and does so. This would create a lower supply of BTC and drive the price up as there would not be enough supply to meet demand.
All this said, while supply and demand are the fundamental forces that dictate market prices, there are many external factors that may influence supply and demand.
Why do crypto prices fluctuate so much?
There are several external factors that may influence the price of crypto:
Fear and greed
Regulation
Market events
Whales
The value of any given crypto is speculative. That means people are buying (or selling it) based on their own opinions and feelings - in particular, fear and greed.
In our example above, where a whale suddenly ditches holdings and floods the market, actions like this can cause fear and panic in the wider market as other investors become fearful about why everyone is selling and may hop on the bandwagon. Equally, when the prices are skyrocketing, investors may act impulsively due to greed and buy at a higher price as they don’t want to miss out on the run.
The feelings of investors make up the wider market sentiment, which can have huge impacts on supply and demand. There’s even a fear and greed index to help you determine the current market sentiment.
As well as this, other external factors can create huge changes in the market - in particular regulation and wider market events. In the US in particular, the SEC's aggressive stance against crypto has previously caused waves in the market as investors are uncertain of the future of crypto in the US. Meanwhile, following the collapse of FTX, prices for many cryptocurrencies dropped drastically as investors sold off holdings due to uncertainty.
Finally, although we’ve used them in our examples above, so-called whale investors can create waves in the market when they sell or buy large quantities of crypto. Notably, crypto analytics firm Nansen analyzed the crash of LUNA & UST - stating that just seven traders caused the initial destabilization and subsequent crash of the once-popular cryptocurrency.
Read next: How does the Crypto Fear & Greed Index work?
How do you know which cryptocurrency will go up in price?
Nobody can truly 100% predict the price of crypto - anybody who tells you they can is lying. However, there are several factors you can use to make more educated guesses on which cryptocurrencies may increase in value within a given time frame, including:
Market sentiment
Technical analysis
Utility
Competition
Governance
Liquidity
Market sentiment
We’ve touched on this already above - but market sentiment has a massive impact on the value of crypto. Crypto is almost always a speculative asset, meaning it's worth whatever people pay. In a bull run, where there's a positive market sentiment, you'll generally see prices increasing across the market, whereas, in a bear run, where there's a negative market sentiment, you'll generally see prices decreasing across the market. You can find out more about bull market strategies and bear market strategies in our guides.
Technical analysis
Technical analysis involves looking at data sets of previous market performance to understand how supply and demand have varied for a given cryptocurrency previously. While previous prices never predict future performance, technical analysis can help investors understand how a given cryptocurrency has prevailed (or otherwise) in turbulent conditions before - and there are even some patterns that may indicate a bull or bear run is coming. Want to know more? Learn how to read crypto charts.
Utility
Although cryptocurrencies are most often thought of as speculative assets - it's not always quite so. Some coins or tokens have specific utilities, so a given purpose. For example, BNB or ETH are used for gas fees on two very popular blockchains and therefore likely in higher general demand. Understanding a token’s potential utility or utilities may help give you an indication of how in demand that token may be.
Competition
Like any market, competition matters in crypto. There are thousands of coins proclaiming to do the same thing - that is, become the new mainstream form of payment. In these instances, you'll need to carefully weigh up whether to go with the market leader or take a risk on a less popular option (or better yet diversify your portfolio).
Tokenomics
An amalgamation of token and economics - tokenomics refers to the economic properties of a given token. In other words, the fundamentals that may make a cryptocurrency valuable or appealing to investors - for example, yields, burns, consensus mechanism, token supply, and token allocations. You can usually find all this information in a token’s whitepaper. If you can’t find a whitepaper (or if that whitepaper makes no sense), you might be looking at a bad investment.
Governance
Governance in crypto refers to the people, or organization, running a given project or cryptocurrency. Generally, in crypto, governance is decentralized, so while specific persons may have initially developed the token, governance is then usually decentralized by allowing token holders to vote on future developments to the protocol. However, this isn't always the case. In some instances, even when some tokens are allocated out to early investors, project developers maintain a majority by holding more tokens. You should always DYOR to understand who holds the power.
Liquidity
Liquidity in this instance refers to how easily you can convert a given token into a fiat currency, or even another token at its market price. For example, Bitcoin has high liquidity, you can easily sell, trade, or spend Bitcoin around the world. Meanwhile, newer projects that aren't yet listed on centralized exchanges or with small pools on decentralized exchanges tend to have low liquidity. Illiquid tokens are prone to drastic price drops if anyone sells as there may not be enough demand.
How does cryptocurrency make money?
Cryptocurrencies are almost always speculative assets, with the exclusion of some pegged tokens. That means investors who hold given tokens make money when demand increases, driving the price up.
Of course, buying and selling cryptocurrency isn’t the only way to make money from crypto. From mining to playing games, there are plenty of ways to earn crypto. Find out more in our 15 ways to earn free crypto guide.
What backs up cryptocurrency?
Most cryptocurrencies aren't backed by any physical asset and its value is speculative, though there are exceptions to this.
For example, pegged tokens are sometimes backed by another value, such as fiat currency or precious metals, but they may also equally be backed by another cryptocurrency or the value maintained via an algorithm.
Read Next: What is a Stablecoin and How is it Taxed?
How does cryptocurrency lose value?
If there is too much supply and not enough demand, a cryptocurrency will lose value. This may happen for a number of reasons, including:
Market news or events
Poor tokenomics
Hacks or rug pulls
These are all easier to understand with examples, and one of the best examples of a token collapsing quickly due to wider market news and events is the FTX FTT token. Following an investigative article from CoinDesk, reporting that FTX's sister company Alameda Research was using FTT tokens as collateral for further loans, many investors had serious questions over the companies' exposure to FTT. Binance, among many, sold off holdings and this sudden bank run caused a sudden drop in price of more than 90% for FTT.
Poor tokenomics may also contribute to a cryptocurrency losing value. A common example of poor tokenomics includes unlimited and uncontrolled supplies meaning supply will always outpace demand. However, more specific examples include inherent flaws with the protocols behind tokens, for example, LUNA/UST. UST was an algorithmic stablecoin, backed by LUNA and BTC reserves, and pegged to the value of a dollar. When one whale unstaked and liquidated more than $2 billion in UST, the huge sell-off caused the stablecoin to depeg, bringing in many arbitrage traders looking to make money from the discrepancy in price. This, in turn, caused a bank run, crashing both UST and LUNA and wiping an estimated $40 billion off the market.
Finally, hacks - specifically common scams like rug pulls - can wipe off the value of a given cryptocurrency in seconds. Rug pulls involve a new token being created, hyped, and then dumped by the project creators at the point the token reaches an ATH. One of the most notable rug pulls was LUNY - a yield aggregator for Solana - that attracted millions in funding for its initial dex offering. Days after launch, all raised capital was sent to an untraceable mixing service and social media for the project shutdown, with an estimated $6.7 million stolen. Learn more about rug pulls and how to avoid them.
What causes cryptocurrency to fail?
Cryptocurrencies can and do fail for a number of reasons including scams, lack of investment or development, or simply because the hype and interest from investors dies down.
Price aggregator, CoinGecko, estimates more than 900 cryptocurrencies on average fail each year.
You can use crypto price aggregators to check the latest price movements of a given cryptocurrency, and some of these even include crypto price predictions based on market trends, technical analysis, and market sentiment. This can help you weed out the winners from the losers, though nothing is guaranteed in crypto.
Can cryptocurrencies be overbought or oversold?
Yes. Cryptocurrencies can be both overbought and oversold and investors can look for signs of these conditions to inform their investment strategy.
Overbought refers to when the price of a cryptocurrency has risen significantly. It can indicate an overly bullish market that may soon experience a price correction. It may be a good time to sell.
Meanwhile, oversold refers to when the price of a cryptocurrency has dropped significantly. It can indicate an overly bearish market that may soon experience a price correction. It may be a good time to buy.
Investors can spot overbought or oversold cryptocurrencies by using technical indicators like the relative strength index.
How does a recession affect cryptocurrency?
Given cryptocurrencies weren't around for global recessions like the 2007 - 2008 financial crisis, it's difficult to say how exactly cryptocurrency values may be impacted by a recession. In fact, the ongoing recession caused in many countries by the Covid-19 pandemic that began around February 2020 initially seemed to have the opposite effect on cryptocurrencies as Bitcoin soared to all-time highs throughout the pandemic in 2020 and 2021.
All this said, in more recent years when there have been downturns in other traditional markets, prices for cryptocurrencies have also fallen. Investors may move to assets perceived as safer within the crypto market such as market leaders like Bitcoin and Ethereum, or stablecoins.
Do other markets impact the price of cryptocurrency?
Yes. Crypto prices may be impacted by other markets.
As crypto has moved closer to mainstream adoption, in particular as a speculative investment asset, markets have become more intertwined than they once were. While crypto remains less affected by macroeconomic factors than other traditional financial markets crypto's exposure to investors with traditional holdings has increased significantly.
Investors impacted by other markets may liquidate their crypto assets in order to maintain positions in other markets, and vice versa. As well as this, crypto investments now exist in traditional markets, through products like Bitcoin ETFs.
How accurate are cryptocurrency price predictions?
The answer to this question very much depends on where you're getting your price predictions from.
There are two main places investors can find price predictions for crypto; crypto pundits or algorithmic price predictors - but it's worth noting both of these can be wrong.
Market experts are generally using a variety of technical analysis tools in order to predict price movements (if they aren't, find someone who is). But as we all know, past performance is not indicative of future prices. As well as this, pundits may be biased, as we all can be, based on their holdings.
Meanwhile, AI-driven prediction tools like WalletInvestor, TradingBeasts, and CoinPredictor use machine learning and AI to predict cryptocurrency prices. The accuracy very much varies depending on the platform and tools used. Research suggests that long-term prediction accuracies can reach up to 70% when using machine learning models.
FAQs
More questions? We got you.
What determines Bitcoin's price?
Bitcoin prices are driven by the principles of supply and demand, just like any other cryptocurrency. When demand is high, the price of Bitcoin rises. When demand is low, the price of Bitcoin falls. Bitcoin has a total fixed supply of 21 million Bitcoins, which may make it more desirable for investors.
How have cryptocurrency prices changed over the last 18 months?
It's been a turbulent period for cryptocurrency, with many huge market events like the collapse of FTX, Celsius, and Voyager, as well as central authorities like the USA's SEC enforcing chaotic and often nonsensical regulations on crypto exchanges. Despite this, the market remains resilient following the so-called crypto winter.
Why does Bitcoin have value?
Bitcoin's main source of value lies in restricted supply with increasing demand as the currency moves closer towards mainstream adoption as a global currency, unregulated and uncensored by central authorities.
