Cryptocurrency, renowned for its value and the technological foundation supporting its existence, exhibits another distinctive feature in the form of its notable volatility.
Even when dealing with the most prominent and well-established cryptocurrencies like Bitcoin, it’s not uncommon to witness fluctuations of 5%, 10%, or 15% in a single day.
If you’ve ever pondered queries like “What causes cryptocurrency to fluctuate” or “When can we expect a resurgence in crypto,” here’s a concise overview of the mechanisms governing crypto markets.
Why Does Crypto Go Up and Down?
Cryptocurrencies aim to be fully digital and decentralized currencies without government backing.
The appeal lies in their independence from centralized control, but this also means they lack the stability provided by government support and a nation’s economy.
As a result, cryptocurrencies trade more like speculative assets than traditional fiat currencies.
Supply and demand, market perception, and competition influence the value of cryptocurrencies, making it essential to grasp these factors in order to comprehend their fluctuations.
Also read: How To Contact Crypto.com By Phone
Supply and Demand
Cryptocurrency values fluctuate based on supply and demand dynamics. Like any traded goods, when demand surpasses supply, values rise.
Cryptocurrencies often limit supply to curb inflation; for example, Bitcoin has a fixed maximum supply of 21 million BTC.
Investor interest determines demand, and external factors such as gas prices and inflation can influence market downturns, prompting investors to withdraw.
Crypto Market Perception
Market perception reflects the value individuals assign to a product, asset, or service.
It’s not identical to market value but closely linked; higher market perception leads to a greater willingness to pay.
For example, the rise in crypto prices is tied to positive market perception, as seen in the 2021 Bitcoin ETF launch.
Conversely, negative events can erode market perception, causing crypto values to plummet.
The confidence of investors determines a coin’s market perception, making market movements unpredictable.
Competition in the Crypto Market
Cryptocurrencies are diverse implementations of underlying technologies, competing to prove their usefulness.
With over 20,000 in the market as of August 2022, new entrants can quickly gain momentum, impacting the values of existing coins.