The crypto market is often depicted as a completely lawless, unpredictable, and terrifying place that can ruin investors in seconds with no prior warning, like a lightning bolt in the middle of summer. But the fact of the matter is that it is just not true. The crypto market is based on the exact same principles that govern the rest of the world’s markets and it obeys the same laws that dictate price movements.
The law of supply and demand, postulated by Adam Smith in his 1776 publication “The Wealth of Nations”, states that at higher prices, buyers will demand less of an economic good, and at higher prices, sellers will supply more of an economic good. The exact same law applies to the crypto market and determines the price of any asset on it, be it Bitcoin or any other token.
The factors surrounding and stimulating the functioning of the law of supply and demand on the crypto market are a completely different matter, and are just as potent as their mirror reflections that affect traditional markets in exactly the same way.
The crypto market is highly susceptible to external factors. Just as geopolitical situations, international events and terror attacks affect the price of oil, so too does the crypto market suffer from external events that affect it. As a young industry that is still non fully regulated or perceived as a serious economy capable of providing benefits and value to average people, the crypto industry suffers from any announcement made about it from states and corporations that are involved in it.
Global adoption is the main goal of the cryptocurrency industry. Becoming part of traditional integrated finance via fintech companies as a means of payment on par with traditional fiat currencies is the ultimate goal that the crypto currency strives to achieve. The attainment of this goal will erase the boundary between fiat and crypto, making digital assets equal in rights, application, regulation, and value with any other means of payment on the global market. Any news related to the adoption of a cryptocurrency by a company, a global corporation, a state authority, a partner project, a major investor, or any other party directly affects the price of that cryptocurrency. Shining examples are Elon Musk’s tweets about the acceptance of Bitcoin as a means of payment for Tesla cars, or the regulation of mining of Bitcoin in China. Positive news increases crypto prices, while negative news drops them.
Infrastructure updates are a major factor determining crypto prices. The improvement of a blockchain network that would allow it to process more transactions faster will instantly affect its price positively, because it will lead to an influx of users seeking such advantages. That would lead to increased demand for that network’s native assets. Increased demand automatically increases prices. A solid example is the introduction of the series of updates to the Ethereum network, or the integration of Layer 2 solutions for speeding up transaction processing and cross-chain interoperability.
Integration of crypto payment solutions is part of adoption, but it is a more hands-on approach to application. When stores start accepting cryptocurrencies as means of payment, demand for such assets increases along with demand for the products and services of the adopting company. As a clever marketing technique, integration of crypto payments directly influences crypto prices.
Political events are major factors determining crypto prices. Since the crypto industry is not fully regulated internationally and there are no unified laws to govern the circulation, issuance and operation of cryptocurrencies, local news in large crypto hubs have instant effects on crypto prices. Crypto-unfriendly regulations, like crypto exchange bans in Turkey or in China, instantly lead to a general drop in all crypto prices, since they negate adoption and integration among large user bases. In stark contrast, crypto-friendly regulation, like the adoption of Bitcoin as a means of payment alongside the US Dollar in El Salvador, positively affects crypto prices, exciting and encouraging crypto investors and users.
Competition is a serious external factor that affects crypto prices, just as competition does on the traditional market. Though there are many blockchains on the market, not all of them are equally popular. The reasons are the inherent problems of all blockchains – scalability and commissions, which impede their growth and broader adoption. That is why competition is so important. When a blockchain rolls out a major software update or a function that increases user convenience and sets it apart from other blockchains as more profitable and versatile, users flock to it and start buying up its native coin to make use of the features, thus leading to a price increase. A solid example is the Binance exchange’s Binance Smart Chain network, which outpaced competing exchanges by evolving into an all-in-one, convenient and versatile ecosystem of products and services.
The price of Bitcoin is the final and single most important external factor that pulls the price of virtually all cryptocurrencies up or down. As the oldest and most expensive cryptocurrency on the market, Bitcoin is the trendsetter and the bar by which all other cryptocurrencies and the market at large are gauged. Bitcoin is the most widespread and most adopted cryptocurrency in the world, meaning it is most often used as a means of payment in stores, considered as an investment by funds and corporations, held as a store of value, incorporated as a means of payment by fintech, and so on. Much like a king, whose whim affects its underlings, Bitcoin’s state and standing in the world is used as a litmus test for the rest of the crypto industry. A classic example is once again that of Elon Musk’s tweets about the use of Bitcoin, which affected not only Bitcoin’s price, but the prices of all other cryptocurrencies.
Apart from external factors, crypto prices are also determined by on-chain factors that are directly tied to the state of the blockchain in question.
Governance is the first internal factor to consider, since it involves the algorithm and conditions for that cryptocurrency’s existence on the market. Changes or conditions to the consensus algorithm for a mined coin determine its price. The convenience, profitability, technical requirements and complexity of mining all affect prices – the more difficult – the less attractive the coin – the lower demand for it – the lower its price. A common example is that of the Ethereum network, which has experienced rapid price growth after it announced that it is transitioning from the highly energy-demanding PoW algorithm to the more profitable and accessible PoS algorithm in the form of Ethereum 2.0. The introduction of internal network updates all led to price increases of ETH upon successful implementation.
Utility is another major factor determining prices. The more useful a token, the higher the demand for it. However, utility is entirely dependent on the functionality of the project and decentralized application hosting the token. Positive development of the projects’ functions and features to cater to user demands and convenience automatically leads to positive traction in both utility and price. A good example is the BNB Binance exchange token, which is appreciating by leaps and bounds ever since the expansion of functionality on the Binance Smart Chain and its ecosystem.
Security is the last important factor influencing crypto prices. The security of a Dapp or network depends on the layers of protective mechanisms it has in place. However, the technology is not impervious and human error often leads to catastrophes, which result in the loss of user funds. Any negative security audit, news of vulnerabilities, technical imperfections in security systems, or even rumors of hacks instantly result in panic among project investors fearing of losing their funds. As investors rush to sell off their assets, their supply increases on exchanges, leading to a drop in prices as per the law of supply and demand.
The law of supply and demand is alive and functioning on the crypto market, just like on any other market in the traditional economy. The main factors influencing crypto prices can be monitored and predicted in a timely fashion and with sufficient experience. The ability to foresee such events, analyze their influence on crypto prices, and act on them is the key to successful crypto market investing.