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How is the price of cryptocurrencies determined? Effective factors in pricing

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The emerging market of cryptocurrencies has a lot of price fluctuations. This market, which has been around for more than a decade, has attracted the attention of many investors, so experts believe that every investor should have some cryptocurrency in his portfolio.

The question that may occupy the mind of every investor and trader is how the price of digital currencies is determined.

Let’s check out together:

What is meant by digital currency?

Decentralized money or digital currency refers to any means of payment that exists entirely electronically.

Digital currency cannot be physically touched like dollar bills or coins.

Digital currency is calculated and transferred using online systems, one of the most well-known types of digital currency is Bitcoin.

Digital currency can also represent fixed currencies such as dollars or euros, which are called stable coins.

Digital money is exchanged using technologies such as smartphones, credit cards, and online cryptocurrency exchanges, and in some cases, it can be converted into physical cash using an ATM.

Also, digital currency is different from cash, which is called fiat currency.

Digital currency can make currency transfers across borders easier and faster than fiat currencies. This form of money also makes it easier for central banks to implement monetary policies.

The use of cryptocurrencies in some forms makes their transactions tamper-proof and censorship-resistant, meaning they cannot be controlled by governments or private organizations.

In general, the following are the uses of digital currencies:

Investment

One of the main uses of digital currency among users and investors around the world is that they use the cryptocurrency market for investment due to its good fluctuations.

Buying from online stores

These days, many of the world’s leading stores and sites allow users around the world to buy from their own stores using digital currency, and people can use cryptocurrencies such as Bitcoin and Ethereum as there are many stores to buy and sell.

Global transactions

Since digital currencies are decentralized and not under the control of any central institution, they can be easily accessible to users around the world and they can use these cryptocurrencies to make transactions anywhere in the world.

Carrying out heavy financial transactions

If we want to do a financial exchange with a large amount of money with the traditional financial system, we have to pay a lot of fees as a fee, while the same thing can be done using digital currency with a much lower cost and more security and even faster.

How is the price of digital currency determined?

In fact, the price of digital currencies such as Bitcoin and Ethereum, like stocks or goods, is determined based on the supply and demand mechanism, for example, when the demand for Bitcoin increases, its price increases.

But the important point about the supply and demand of Bitcoin is that Bitcoin is prone to large price fluctuations due to the severe limitation of supply and its cap of 21 million coins, but other cryptocurrencies such as Ethereum do not have any cap on their supply.

There is also another type of cryptocurrencies whose price is always fixed, these types of cryptocurrencies are called stablecoins.

Stablecoins have a 1-to-1 link with an international currency such as the dollar. Tether is a type of dollar-denominated stablecoin whose price.

It is always $1 regardless of supply and demand.

In addition to this, the supply and demand in the cryptocurrency market is influenced by many factors, these factors include the opinions of important figures in the world, the movements of whales in the digital currency market, the activity of various media, how to extract cryptocurrency, public acceptance in society, laws and government policies which are related to cryptocurrencies, the volume of digital currency transactions, the support of famous people and celebrities, the speed of digital currency transactions, the competition between different digital currencies, the practicality and purposefulness of digital currency, etc.

For example, when laws and regulations in a country are in favor of cryptocurrencies, it can cause an increase in demand, which ultimately leads to an increase in the price of a cryptocurrency.

Effective factors in digital currency pricing

Supply and demand

Like the stock market, cryptocurrency prices change based on supply and demand, and the main factor in price changes is cryptocurrency.

As more people want to use a cryptocurrency, the demand for it will increase, which will increase the price of the cryptocurrency.

On the other hand, if there is not much interest in the digital currency, its value will decrease significantly.

Opinions of important personalities of the world

Due to the nascent nature of the cryptocurrency market, the opinions of important figures in the world strongly affect the price of cryptocurrencies.

For example, Elon Musk, one of the world’s super capitalists, who is known as a technological visionary who owns Twitter, has a page with More than 110 million followers on this platform.

He regularly talks about various topics, one of which is digital currencies such as Bitcoin or Dogecoin.

Therefore, the effects of Elon Musk’s tweets on the price of Dogecoin and Bitcoin are significant.

In 2021, at the peak of the cryptocurrency bull market, when Elon Musk praised Dogecoin, the price of this currency suddenly experienced a 3-digit increase, so it can be concluded that the opinions of important global figures on the price of cryptocurrencies it affects.

The movements of whales in the digital currency market

Whales are people who have a lot of Bitcoin, Ethereum or other digital currencies in their wallets.

Bitcoin whale is a wallet address that has more than 1000 bitcoins in it.

On the other hand, people who own large amounts of other cryptocurrencies are known as “crypto whales”.

Whales make money for themselves while influencing how other cryptocurrency traders trade.

That’s why it’s so important to keep track of what these whales are doing.

One of the most common methods used by whales is the pump and dump tactic. Whales have enough capital to increase the price of stocks, coins or tokens, or so-called “pumps”.

Activities of different media

Social media and online news outlets are the first place many people turn to when they want to follow the latest cryptocurrency news.

Even professional journalists take to Twitter when they want to know what the public is up to and what the next big thing is.

Cryptocurrency news is usually first published on Twitter and other social media, which is why social media, especially Twitter, has a significant impact on cryptocurrency prices.

The way digital currency is mined

Cryptocurrency mining means adding and confirming new digital currency to the blockchain.

To confirm a transaction, a very complex mathematical equation must first be solved, crypto miners are all fighting for the chance to be the first to crack the puzzle.

Any miner who solves the equation first wins a prize and owns some of that digital currency, then the process starts all over again, the more miners you have, the bigger the profit margin.

According to some experts, mining is a very good system for cryptocurrencies because it keeps the blockchain safe, but its negative effects on the environment should not be ignored.

Also, the method of mining any cryptocurrency can affect its price, for example, mining Bitcoin is a costly process due to high electricity consumption and unique hardware, therefore, the higher the cost of producing a Bitcoin, the higher it can affect the price of this cryptocurrency.

General acceptance in society

Trust in digital currencies is almost 100%, more than 60,000 respondents worldwide were asked about digital currency and 97% of them consider digital assets, especially digital currencies, as a safe and viable way to earn money through investment.

Institutional and retail interest in major cryptocurrencies such as Bitcoin and Ethereum has grown exponentially since 2020.

Those who do not yet own digital currencies express their desire to invest in crypto in the coming years.

In fact, 63% of adults in the US want to learn more about cryptocurrencies and are interested in joining the market.

The exponential increase in people’s interest in cryptocurrencies can increase demand and naturally increase its price in the near future.

Government laws and policies

As the use of digital currencies increases, so do the regulations countries put in place to control digital currencies around the world.

The crypto landscape is constantly changing and it is not easy to keep up-to-date with the laws in different regions of the world, so the government’s fumbling to regulate cryptocurrencies increases volatility in the cryptocurrency market.

The volume of digital currency transactions

The effect of transaction volume on the price of cryptocurrencies is quite clear, the more the volume of cryptocurrency transactions in digital currency exchanges, the more dynamic and powerful the market is.

Just like in 2021, when the volume of cryptocurrency transactions had reached its peak, we saw a sharp increase in prices. but on the contrary, when the volume of transactions or buying and selling of cryptocurrencies is low, we see the market’s lack of prosperity.\

Support of famous people and celebrities

The crypto ecosystem has become home to many celebrities over the years.

These guys are mainly promoting Non-Factory Tokens (NFT). Over the past year, celebrities have been active in other areas besides NFT.

These people try to be present in the game industry, business and other areas of investment.

For example, the promotion of a cryptocurrency by the famous American celebrity Kim Kardashian caused a sharp increase in the price of this cryptocurrency, which was immediately investigated by the federal police and the celebrity was reprimanded.

The speed of digital currency transactions

Transaction speed is the number of transactions that happen per second.

To check the speed of transactions, the duration of the transfer of cryptocurrencies from the source wallet to the destination wallet should be considered.

Another importance that transaction speed has, is it can be used to determine the scalability of digital currency.

The Solana network, which is the fastest blockchain network, can perform 29,000 transactions per second, with a finalization time of 2.5 seconds.

In fact, the faster a blockchain network works and has good comparability, the more investors will pay attention to it, and the token of that network can experience a lot of growth because the scalability of blockchains is the most interesting technical capability among experts, which determines its value.

Competition between different digital currencies

Competition is an inseparable part of financial markets, the digital currency market is no exception, and among the thousands of diverse digital currencies that are available in the market today, we always see the competition of different projects to attract investors.

Digital currencies and networks, each of which is trying to introduce itself as the best network in the market and occupy a better position by providing diverse and attractive services.

Ethereum and Ripple are among these currencies that have been trying to maintain and improve their position in the market since their launch with continuous development and new services.

Functionality and purposefulness of digital currency

As we have already explained, digital currencies are a form of assets that have been created with encryption protocols and can be used in a wide range of daily tasks.

How practicality and purposefulness of digital currencies can affect the price of cryptocurrencies?

In the crypto market, there are thousands of cryptocurrencies, each of which has a specific application.

Smart and experienced investors usually choose cryptocurrencies that have a unique application and a complete and comprehensive roadmap for investment by studying and researching.

For example, at the beginning of its journey in 2015, the Ethereum cryptocurrency was able to attract the opinion of wealthy investors by presenting a clear and comprehensive roadmap, which caused its price to increase in a short period of time.

In the current market, there are cryptocurrencies that have special and practical features and complete roadmaps, beginner investors who are new to the cryptocurrency market should not be fooled by the flashy advertisements of the media and celebrities and on the cryptocurrencies that basically, they are called Shitcoin or Memecoin to invest.

Why there is fluctuations in the price of digital currencies?

The digital currency market, like other financial markets, has a lot of price fluctuations, and these fluctuations provide opportunities for traders and traders to earn a lot of profit.

Also, the fluctuations of the digital currency market make this market very exciting.

Some of the reasons for the volatility of the digital currency market are as follows:

New and emerging market

One of the reasons for the fluctuations in the price of digital currencies is the nascent nature of this market.

Although digital currencies have attracted a lot of media attention in recent years, their market value is still lower than fiat currencies and gold.

At its peak, the market was worth only $3 billion, while the total gold market is $7.9 trillion and the US stock market is about $28 trillion.

This small market size means that even small factors can have a big impact on prices.

Another reason for the fluctuation of the price of digital currencies is the lack of legal supervision in the field of cryptocurrency.

It is better to know that digital currency or cryptocurrency is an emerging global phenomenon and governments have strict positions towards it.

Imposing restrictive laws provides the possibility of market manipulation, which in turn causes high fluctuations in the cryptocurrency market.

Is the price of digital currency predictable?

To be honest, no asset class is predictable in any market.

Markets are dynamic and move by various criteria, some known and some unknown.

There are many more unknowns with cryptocurrencies as the asset class is only 12 years old and highly volatile.

Government policy changes can have a great impact on the price of any asset.

Everyone should collect more data and take risks in the cryptocurrency market instead of relying on predictions.

Does the price fluctuation of Bitcoin affect the pricing of other digital currencies?

In the digital currency space, the movement of many coins and tokens is based on the behavior of Bitcoin.

When Bitcoin (BTC), the largest digital currency by market capitalization, rises, so do the values of other digital tokens.

When the price of Bitcoin decreases, it is likely that other currencies in this market will decrease at the same time.

One explanation for Bitcoin’s resilience relative to other digital currencies is that investors in the space may consider Bitcoin to be the most stable digital currency at the moment.

What is meant by the intrinsic value of a digital currency?

The intrinsic value of a digital currency is not equal to its market value, so investors check the difference between the intrinsic value and the market price to buy and sell digital currencies.

If the intrinsic value of a digital currency is higher than its market value, traders buy at this time and this digital currency is called undervalue.

In the opposite case, digital currency is called (overvalue).

For digital currencies, especially the initial supply of tokens that have not yet become a reality, it is not possible to estimate their intrinsic value.

The intrinsic value of a digital currency examines all tangible and intangible aspects of a digital currency.

In order to estimate the intrinsic value of a digital currency, it is necessary to examine some related factors, otherwise a correct estimate of the intrinsic value of a digital currency will not be obtained.

Among these factors, it is possible to consider the level of market demand for it, the level of the ability and capability of the team to realize the project’s goals, and the evaluation of the amount of financial support to achieve the results of a project that is achieved through participation and investment mechanisms and… etc

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