Factors Affecting Cryptocurrency Price and Volatility

Factors Affecting Cryptocurrency Price and Volatility


Cryptocurrency remains one of the most volatile financial assets. While this makes crypto a high-risk investment given the potential for loss, the truth is volatility operates as a dual pathway, presenting investors with considerable opportunities for gain.

For instance, the cryptocurrency future and spot trading represent different levels of volatility. While future trading highlights the peak of volatility by allowing traders to make considerable profit or loss within a short period, spot trading offers traders a chance to buy and hold crypto assets for longer duration, hence, it is said to offer proper informed portfolio-management and is, therefore, considered a realistic and long-term investment option.

Essentially, the value of a cryptocurrency can change anytime because of the dynamic nature of market movement caused by the following factors:

  • Supply and Demand: It is vital to note that cryptocurrency fuels another type of finance (Decentralized Finance); hence, it is subjected to basic economic rules like supply and demand. Generally, economics teaches that when the supply of an asset is significantly higher than the demand for it, the price of the asset is likely to fall over time. Conversely, when demand for an asset or commodity increases beyond supply, the value of the asset grows.
    This rule also applies to cryptocurrency trading. Hence, before investing in a crypto asset, you must confirm necessary details like, liquidity, total supply, circulating supply, trading volume, market capitalization, and vesting periods to determine how the value of the cryptocurrency will turn out.
  • Technological Advancement: Majority of cryptocurrencies in the marekt today have underlying ecosystems that can contribute to growth or depreciation over time. An ecosystem with notable innovations and technological advancement can impact token prices positively. For instance, Binance, a leading crypto exchange, has introduced users to innovative trading options like, staking, spot and future trading, and more. This has contributed to the value of BNB, the ecosystem cryptocurrency.
  • Macro-Economic Factors: Factors like inflation rate, regulatory policies, cryptocurrency tax, interest rate, and other economic trends can impact the price of crypto assets either positively or negatively. For instance, uncertainty on tax rates, high tax rates, or lawsuits usually reduce users’ interest in cryptocurrency, which may result in a downward price movement.
    The release of updated tax guidelines by the IRS in March 2021 improved cryptocurrency price movement, with Bitcoin reaching an all-time high of nearly $64,000 in April 2021. Conversely, the announcement of the lawsuit against Binance on June 5, 2023, made BNB fell from $330 to $220 the next day, resulting in a nearly 33% reduction in price.
  • The Fundamentals: Essential elements like how decentralized an ecosystem is, the scalability of the blockchain, and liquidity when trading a particular crypto asset can determine price movement over time. For instance, use cases are likely to increase on a secured and scalable blockchain, and when this happens, the price of the ecosystem token (which is likely used by users and developers to pay for gas fees) may increase. Also, liquidity determines how readily tradeable a crypto asset is. Trading an asset with high liquidity is extensively easy and free of friction; this may reduce the payable gas fees and increase the interest of traders in the asset. The combined effect of these factors may put upward pressure on the asset’s price.
  • Market sentiment: The value of an asset can be considerably affected by what major traders and users think about the asset in particular or the crypto market in general. Generally, good news can drive passion for cryptocurrency investment, while bad news can undermine users’ interest. For instance, concerns about the financial health of the FTX Exchange in 2022 sent a destructive wave through the crypto space, causing a withdrawal surge and liquidity crisis, which eventually resulted in the fall of the exchange.

Conclusion
Investing in cryptocurrency requires that you conduct due diligence. Taking the words of every project for it on a platter of gold often comes with detrimental results like loss of assets. Hence, before you decide to invest, it is important to do quality research. Also, opting for secure investment approaches like staking and liquid staking may offer stability. If you are considering stable investment options in the crypto space, check out the ChainNodes ETH liquid staking to earn a reward on your Ethereum.