How do cryptocurrencies get their value? If I were asked this question, without thinking twice, I’d say the price of cryptos is determined by the rate of adoption, the amount of FUD or hype around a certain coin, as well as government regulations in general. Well, this article will clearly explore how cryptocurrency prices work. First, let’s see how these digital assets compare with fiat currencies.
For a start, while fiat currencies are backed by central governments, their digital counterparts are not backed by any government or commodity of value. Fiat currencies are legal tenders and get their value from what the central government states – fiat currencies are often controlled by central banks who manage the supply of money, and indirectly control the rate of inflation.
Although some cryptos are gaining some traction, they are still not a legal tender in most part of the world (one or two cities have come out to say that citizens can pay their taxes with bitcoin). It is also worth noting that while fiat money can always be printed, cryptocurrencies generally have a fixed supply, thus, devaluation of cryptos as a result of inflation is almost impossible.
Why do the Prices Keep Fluctuating?
It’s been a stream of green in the past one week, but by the time I opened my app to check how the market was doing from last night, a lot of cryptos were in the red. You may probably have wondered why there is so much fluctuation in prices; from almost $20k in December to almost $5k by June, in the case of Bitcoin.
The market is still in its infancy stage, and this is one of the characteristics of a nascent market. Many people are still unfamiliar with the term cryptocurrency or the underlying tech, blockchain.
In the wake of 2018, hundreds of new adopters joined the market, and some exchanges recorded a daily influx of up to 100,000 new users. Many of these new members are interested in the price of cryptocurrencies going up. If it does within a short time frame, they are bound to tell others. This contributes to the disruptive nature of the market, as well as increase volatility.
There’s also the problem of price manipulation. Traditional forex markets are well regulated. The same cannot be said for crypto markets. A whale or group of individuals come easily come together and manipulate the price of cryptocurrencies with low market cap in pump and dump actions. Also, it is ironic that the assets of a decentralized market are controlled by centralized exchanges. This gives these exchanges an incentive to manipulate the prices of cryptos. They can do this by manipulating the price feeds, pumping traders to either buy or sell. The case of Bitcoin Cash being listed on Coinbase comes to mind.
Finally, the crypto market responds to news and rumors. A lot of people took positions in Ripple on the assumption that it will get added to Coinbase at the beginning of the year. Sadly, that is yet to happen. Since the market is still new and most governments haven’t given a concrete decision on where they stand, any news or rumor tends to affect market prices.