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What makes cryptocurrencies go up in price
What makes cryptocurrencies go up in price
Crypto

What makes cryptocurrencies go up in price

By Marco Cavicchioli - 12 Jul 2020

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The crypto market is characterized by volatility, but what makes cryptocurrencies go up in price? 

To begin with, a distinction must be made between cryptocurrencies that have an underlying and those that do not. 

In fact, in the case of tokens that represent an underlying, such as USDT which represents the US dollar, their price rises and falls along with that of the underlying. 

In particular, if the ratio between the token and the units of the underlying is 1:1, then the token price will always vary according to the changes in the underlying and will always tend to fluctuate around the parity with the original underlying.  

Actual cryptocurrencies, however, do not have an underlying, so the dynamics of their prices follow different logics. 

For example, BTC, ETH, XRP, and the other cryptocurrencies without an underlying have a price that varies only according to the relationship between supply and demand on the exchange markets. 

These markets are usually crypto exchanges, where cryptocurrencies can be traded with other cryptocurrencies or fiat currencies. 

Usually, it is the exchange rate in US dollars that is used as a benchmark to determine the price. 

To be precise, it is the rate at which the last trade took place, and since each exchange only takes as reference the trades that take place on their own platform, it is inevitable that the prices published by individual exchanges are different. 

That said, the price varies as a result of the change in the balance between the seller and the buyer. That is, when demand rises, the price tends to rise, while when it falls it tends to fall. However, also the supply is important, which makes the price go down when the supply goes up, and vice versa. 

There are therefore nine different cases, eight of which tend to make the price move. 

In fact, if supply and demand do not vary, then the price tends to remain fixed. 

If, on the other hand, both increase or decrease, only if they do so with the same intensity would the price remain fixed. But since it is rather rare that supply and demand both move in the same direction, and with the same intensity, in these cases, it will be the one that moves with greater force to make the price rise or fall. 

There is also the possibility that one of the two will move, while the other will remain stationary, but it is much more frequent that both will move, or both remain constant. 

As a result, the price rises either when demand rises more than the supply, or when supply falls more than the demand. 

Obviously, if demand increases and supply decreases, the price will increase more than, for example, when demand grows and supply grows a little less. In other words, not only does it matter that the price may rise, but also how much it actually does so as a percentage. 

However, these are only the scenarios that are observed in crypto markets following some factor causing supply or demand to rise or fall, or both. 

Unfortunately, it is impossible to determine exactly which factors increase the demand, or decrease the supply, because they can be countless. Moreover, they are also often different, i.e. they are rarely the same factors that move supply and demand, and very often different factors act at the same time, working together in one direction (upwards) or in the other (downwards).

Hence, it is rarely possible to identify a single factor responsible for these movements. 

However, as far as Bitcoin in particular is concerned, there is a single factor that reduces supply: the halving

The halving reduces in half the reward for the miners, i.e. the BTC created out of nothing every 10 minutes or so, but in the long run, this can lead to a reduction in supply in the markets. 

In fact, miners are often forced to sell all, or almost all, of the BTC they manage to mine in order to pay with fiat currency the substantial costs they have to incur, and when the BTC they receive halves in the long term, the amount of BTC they sell on the market also decreases. If this reduction in supply occurs at a time when demand is not decreasing as sharply, then the price tends to rise. 

There are also times when it is possible to identify a single factor that has increased the demand for a cryptocurrency more than its supply, or reduced its supply more than its demand. 

Usually, these individual factors are related to news, rumours or novelties concerning a project behind a cryptocurrency, or its tokens. 

For example, the recent announcement that just under 10% of all BTT tokens in circulation have been staked on DLive has presumably increased demand for BTT on the exchanges, and perhaps even reduced supply, causing a significant and sudden price increase. 

However, news or novelties are not always able to move supply and demand, so it would not be correct to say that these are the dynamics behind any increase in cryptocurrency prices. 

There are also other factors, including financial speculation or the intervention of some big whale able to increase rapidly and in significant proportions the demand for a certain cryptocurrency. 

In short, these are extremely complex scenarios, of which often only the superficiality is known, or sometimes not even that, but other times they can be easier to understand because they are simpler to analyze. 

The fact remains that on public crypto markets, tens of billions of dollars are now traded in cryptocurrencies every day, sometimes with peaks even higher than hundreds of billions of dollars a day, and with these volumes, it is unavoidable that the logics that influence supply and demand are complex. 

 

Marco Cavicchioli
Marco Cavicchioli

Class 1975, Marco teaches web-technologies and is an online writer specializing in cryptocurrencies. He founded ilBitcoin.news, and his YouTube channel has more than 25 thousand subscribers.

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