What Causes Cryptocurrency to Rise and Fall? Four (4) Factors That Drive Price Action

Are most crypto investors and traders eager to know what causes cryptocurrency to rise and fall? In simple terms, the value of each cryptocurrency is affected by the same supply and demand principles that apply to business. For example, as the demand for a specific crypto token increases, the token price quickly rises. On the other hand, as the demand for a crypto token decreases the price goes down.

For traditional markets that would be considered a full explanation, but in the crypto space what really causes the prices of crypto to go up and down can be anything from fear of missing out (FOMO), international news such as the war in Ukraine, or if a project got hacked.

There are so many different factors that affect the price of Bitcoin and many other tokens. If you’re among the crypto traders or potential investors who still can’t fathom what makes the cryptocurrency go up and down, let us explain. 

Crypto Volatility 

The cryptocurrency space has been filled with reports of how an average income earner became an overnight billionaire due to rising crypto prices, as well as how an investor lost it all to the market because of a major price dip. 

For instance, earlier this year, most cryptocurrencies, including bitcoin (BTC), surged to a new all-time high (ATH), with several investors recording massive gains. However, it did not take long before things turned sour for many, when the price of the largest cryptocurrency by market capitalization shredded almost 50% of its value within a blink of an eye. 

While knowing the factors that cause prices to rise and fall does not mean you can completely predict the market, the knowledge would go a long way to helping you invest in only solid crypto projects

The constant price fluctuation of digital currencies has prompted many to ask why bitcoin prices fall and rise. Let us answer that question for you.

What Causes Cryptocurrency to Rise and Fall? 

While there are several determinants that could be used to identify what causes crypto to rise and fall, we’ve decided to group them into four factors for the purpose of this section. 

1. Project Fundamentals

The crypto project fundamentals will give you an understanding of whether the cryptocurrency has intrinsic value. In simple terms, a crypto’s fundamentals help you measure its worth. The main goal of the project’s fundamentals is to help you decide whether the cryptocurrency is overvalued or undervalued.

Note that this does not mean you do not believe in the future of cryptocurrency. It simply means you’re being careful as an investor and you do care about what causes crypto to rise and fall in the short-term.

When conducting fundamental analysis to determine the intrinsic value of the cryptocurrency, you will need to consider reading the token’s whitepaper, to know everything about the asset. 

Aside from reading the token’s whitepaper, you may need to conduct due diligence and learn how to know a crypto rug pull. Doing so makes it easy to verify whether the information published in the paper is genuine. There are three metrics that will guide your journey into evaluating cryptocurrency fundamentals and they include: 

On-Chain Metrics 

Investors need to study the token’s blockchain data that has been published on cryptocurrency data sites like Coingecko, CoinMarketCap and CryptocurrenciesToWatch to make better investment decisions. The major factors you should consider for this metric include: 

  • The number of transactions conducted within a specific time.  
  • The value of the transactions is conducted within a given time. 
  • Number of active addresses 
  • Transaction fees paid 
  • Hashrate and volume staked. 

Project Metrics 

This metric will help you determine the performance of the team. Factors for this metric include: 

  • The whitepaper 
  • The team members 
  • Project competitors (More on this later). 

Token Metrics 

The token metrics of a cryptocurrency project give you an insight about how the coin has been distributed since inception as well as its current market value. Factors that will aid your judgment include: 

  • Token market capitalization. 
  • Liquidity and volume 
  • Supply mechanisms. 
  • Token Supply Dynamics 

This concerns how the team intends to release new tokens to the market. The team should have a rational formula in place that will be used to issue the token for public use. Once there is no proper token supply dynamics, it will affect its price negatively, thus causing investors major losses.

When considering the token supply dynamics, it is imperative that you look at the three main metrics, which include: 

Max Supply 

The max supply of a cryptocurrency refers to the amount of the coin that will ever exist during its lifetime. This is designed in a way that once the token reaches the max supply value, it will automatically stop producing or mining new coin coins. For instance, bitcoin is designed to have a max supply of 21 million coins. Once miners successfully produce the 21th million coin, the supply will be cut off, stopping miners from producing more BTC.  

Total Supply 

This encompasses the total number of coins that are currently in existence, including the tokens locked and the ones in circulation. This excludes the number of coins that have been burned from the token’s max supply. You need to keep an eye on the tokens that are locked in order to ascertain when they will hit the market. Once a significant amount of the token is released, it is expected that its price will crash, and vice versa.  

Circulating Supply 

A token’s circulating supply refers to the amount of crypto that is currently available in the market for trading purposes. Coins that are locked up are not included in this metric. Circulating supply is used to measure a crypto’s market capitalization,  which is obtained by multiplying the number of circulating cryptocurrencies with the price of the asset. 

2. Protocol Upgrades and Historical Events

Upcoming upgrades and historical events are among the factors that can make the price of bitcoin rise and fall. If the cryptocurrency is tipped to receive a major upgrade that will usher in better features such as enhanced efficiency and support across multiple markets, investors will be happy to purchase the asset, thus causing its price to surge. 

However, if the upcoming upgrades do not seem like one that will promote the token’s widespread adoption, investors will be forced to sell the asset across various exchanges, and as such causing its price to plummet by a large margin. If the upgrade is healthy, then there is a clear chance that it will be in your favor, and vice versa. 

An airdrop for token holders is also among what causes cryptocurrency to rise and fall. Like in the recent XRP Flare airdrop, investors might notice the price of the asset rising in the days and weeks leading up to the snapshot date provided by the project. After the snapshot, the asset’s price might plummet as investors head for the exits with confirmation that they’re now eligible for the airdrop of new tokens.

There are also weekly events like the CME Bitcoin Gap and other specific historical events for most cryptocurrency that will always influence its price. For instance, the Bitcoin Halving is an event that occurs every four years in a bid to reduce the number of coins that will be produced by miners. During Bitcoin halving, miners’ rewards are slashed to two. Cryptocurrency experts believe that this scarcity feature will always propel the asset’s price to soar higher, especially when the event is live.     

In order to take advantage of these developments and events, you can look at the crypto’s roadmap to see the upcoming upgrades that are lined up for the token. Research on each of them to know whether the price will be affected negatively or positively. 

3. Competition 

When getting started with cryptocurrency, it is imperative to identify the competitors your chosen crypto compares against, as it determines whether the token will be widely adopted. Traders will most likely sell off a token when it is evident that the project does not level up with their competitors and this will affect its price negatively. 

You should evaluate a project’s competitive strength in the market by asking two major questions: 

How many competitors does your chosen cryptocurrency compare against and the method it is using to remain competitive in the market? 

However, if there are many competitors, it will limit the chances of the project gaining widespread adoption. The method at which crypto founders plan on gaining dominance in the market could determine whether people will still want to buy into the project. 

4. General News and Market Events 

This is considered the most influential factor that causes bitcoin prices to rise and fall. It does not matter how perfect crypto fundamentals and token supply are, its value will be determined by industry news and market events. 

Things may change in a flash due to updates beyond industry players’ control. Financial regulators may choose to clamp down on cryptocurrency activities within their jurisdiction, which may send the price of the asset class crashing.

Similarly, government officials and corporations could announce that it will adopt a certain cryptocurrency as a payment method, and this update could send the price of the asset class soaring rapidly. 

While you cannot determine the nature of the update and how it will affect the price of your favorite asset class, it is advisable that you stay abreast of the latest news updates and developments across various crypto-related media outlets like Coinfomania, CoinDesk, Cointelegraph etc. 

Frequently Asked Questions (FAQs) About Why Cryptocurrencies Rise & Fall  

We’ve compiled a list of frequently asked questions about why cryptocurrencies are rising and falling. 

Why Does Bitcoin Rise and Fall? 

The reason bitcoin prices rise and fall is strictly because of the supply and demand of the cryptocurrency. If BTC demand outweighs supply, then prices are set to go high. However, if supply outpaces demand then prices will likely dip. 

Unlike other economic commodities like gold, certain factors are responsible for the demand and supply of cryptocurrency and they include, token supply dynamics, general news and market events, competition, project fundamentals, protocol upgrades, and token’s historical events. 

Who Controls the Price of Cryptocurrencies? 

Market participants control the price of cryptocurrencies, and are thus responsible for what causes crypto to rise and fall.

The three main participants that control the price of cryptocurrencies are miners, cryptocurrency trading platforms, and traders. The miners are individuals or firms that invest in equipment that generate computational power for the production of new coins.

Exchanges are platforms where traders buy and sell different cryptocurrencies. Traders are categorized into retail, institutional, and corporate traders, and they are responsible for buying and selling coins and tokens. 

Why Should Investors Consider the Factors That Cause Cryptocurrencies to Rise and Fall? 

The objective of every trader is to make gains from crypto trading and knowing the factors that cause cryptocurrency prices to rise and fall is important. Having a good knowledge of these factors tells you whether it is safe for you to buy the cryptocurrency and which coin you should avoid putting your money into. 

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