What Influences the Price of Crypto?

Wondering why crypto is up or down today? Learn about the key factors that affect crypto prices.

Key Takeaways:

• Crypto markets are volatile, and it is these price swings that can produce potential trading opportunities as well as risks.

• Supply and demand are what ultimately drive crypto prices up or down. The key factors can be further described as related to fundamentals, macro, sentiment, and technical forces. 

• Understanding how these different factors impact crypto prices can potentially help to improve trading knowledge.

Why Is Crypto Down Today and Up Tomorrow? Crypto Markets Are Volatile

Many traders have often heard that crypto markets are volatile. While crypto prices do fluctuate quite a lot, creating risks, it is these price swings that produce potential trading opportunities.

But what causes these price swings for crypto? Let’s take a look at some of the key factors below.

Factors That Influence the Price of Crypto

Supply and Demand

Economics 101 tells us that price is determined by supply and demand. This applies to cryptocurrency, as well; theoretically, the more demand for it relative to supply, the higher the price will be, and vice versa. 

In other words, if more people want to buy crypto compared to those who want to sell, then, in theory, the price should rise. On the other hand, if more people want to sell compared to those who want to buy, then the price theoretically would decrease.

But what are the reasons driving some to buy or some to sell crypto? We can broadly describe them as being related to fundamentals, macro, sentiment, and technical forces. These are not mutually exclusive, and there are linkages between them.

In cryptocurrency, supply is also often associated with the supply mechanism of a particular token in tokenomics. Some tokens are designed to have a fixed supply, like Bitcoin; while some are not capped, like Ethereum.

There are market participants who view tokens with a fixed supply as having less selling pressure, and vice versa. Also, upcoming supply unlocks for significant holders of the overall token supply (e.g., protocol founders, early investors) are sometimes seen as unfavourable for the price, as the market might anticipate selling pressure if these holders decide to sell their large holdings.

Other events that could impact supply, like halvings and token burns, may also influence prices. For example, Bitcoin’s halving events (which reduce new supply) are seen by many observers as favourable for the price — after Bitcoin’s most recent halving in 2020, the price did, in fact, increase substantially.

Read more about Bitcoin halving.

Fundamentals

In stocks, fundamentals typically refer to factors that ultimately impact a company’s profits, growth, and financial health (i.e., sales volumes of products or services, profit margins, and amount of debt on the balance sheet).

In crypto, while it is sometimes a criticism that many protocols do not generate profits and, therefore, do not have any fundamentals in the traditional sense (as applied to stocks, for example), there are some factors outside of traditional financial metrics that can indicate how ‘healthy’ the protocol is and how fast it is growing.

A protocol’s health and growth can be seen in measures like the increase of network addresses, node count, developers’ activities, the number of decentralised apps (dapps) existing or in development on the network, scalability and decentralisation, network security, and the amount of potential real-world use cases for the protocol.

When it comes to blockchain scalability, which is a critical fundamental aspect, there are three interrelated concepts: security, speed, and decentralisation.

• Security: This is the level of defensibility against attacks from external sources and resistance of the system to tampering. In general, lower barriers to entry of the network result in higher decentralisation but lower security (as collusion could be easier). For example, the Bitcoin blockchain’s hashrate can be seen as a measure of its security. Protocols that are easily and/or constantly hacked or exploited may be seen as having weaker fundamentals, and vice versa.
  
• Speed: The transaction speed of a network is typically used to assess scalability; some key contributing factors are throughput (e.g., transactions per second, also known as TPS) and block confirmation time.
  
• Decentralisation: This is the degree of diversification in ownership, influence, and value on a blockchain. For a Proof of Stake (PoS) blockchain, for example, the number of stake pools or validators could be used to assess decentralisation.

Learn more about blockchain scalability.

Additionally, technical development is another important factor. Any significant advancements or changes in the crypto’s underlying network — the introduction of a new feature or a major upgrade to the network — could impact the price and potentially increase value. For example, the price of ETH increased in the few months preceding Ethereum’s major upgrade, ‘The Merge’.

Learn about Ethereum’s ‘The Merge’.

Protocols that show improvements in fundamentals over time or compare favourably versus another protocol might see more individuals wanting to buy their tokens, resulting in a price increase. On the other hand, if these fundamentals are deteriorating for a protocol, then holders may want to sell the token instead, leading to a price decrease.

Macro

Macro factors are those that affect the broader real-world economy. Because crypto does not exist in a vacuum, these factors also affect the price. For example, if there is a recession in the economy, individuals may be less likely to make investments or spend money (including on crypto). They may, in fact, sell any investments they already hold. This would affect the crypto prices, as well. On the other hand, when economic growth is strong and investors’ appetites for risk are high, asset classes like stocks and crypto tend to be favoured, leading to an increase in buying. 

Crypto market participants are aware of the continual talk about interest rates and inflation. These are good examples of macro factors that can affect crypto prices. Central banks combat high inflation by raising interest rates, but one worry is that too much hiking could lead to a recession in the economy.

Sentiment

While many things can affect sentiment towards crypto, including those mentioned elsewhere in this article, sentiment refers to factors that affect people’s desire to buy or sell a certain token mainly based on their emotions, and not, for example, on the fundamentals of the protocol. 

One particularly prevalent example in crypto is news and social media hype. Those who see a lot of hype on social media about a certain token (e.g., their favourite celebrity or influencer buying one) may feel a fear of missing out (known as ‘FOMO’) and want to buy it, but without knowing much else about the protocol. This surge in demand can lead to the price increasing. For example, Elon Musk’s tweeting about Dogecoin sometimes makes the token’s price react positively around the time of the tweets.

On the other hand, some might see a lot of negative comments about a token (known as FUD — ‘Fear, Uncertainty, and Doubt’) and want to sell instead, resulting in the price dropping. Making decisions based on emotions represents an area of study called behavioural finance, which states that people often make irrational decisions due to cognitive biases.

Learn more about behavioural biases in finance.

Technical Forces

Other external forces could also impact demand and supply for crypto.

For example, there are many traders who use trading signals to indicate to them when to buy and/or sell. Because there are some very popular signals, if everyone buys or sells at the same time using that same exact signal, it could result in a sudden surge in buying or selling, therefore affecting the price. 

Another example could be ‘short squeezes’, where traders who are short a crypto, thinking the price will decrease, suddenly experience a price surge instead. In order to limit their potential losses, they all start closing their positions (which is done by having to buy), leading to a cascading effect of buying pressure, which causes the price to increase even more.

Read more about trading signals like chart patterns, as well as golden crosses and death crosses.

In traditional finance history, some bear market price drops for stocks were exacerbated when quantitative funds (which all used automated trading strategies based on the same trading signals) all sold at the same time due to the automated nature of their trading. This contributed to the selling pressure even more. Of course, the opposite could happen, as well, where everyone buys on the same signal, therefore adding to the buying pressure.

Also consider grid trading, a type of automated trading strategy.

Final Words: Why Crypto Might Be Up or Down Today

While crypto prices can fluctuate quite a lot, it is precisely these price swings that produce potential trading opportunities. Crypto prices are ultimately influenced by supply and demand, and we can further describe the key causes as related to fundamentals, macro, sentiment, and technical forces.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. 

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.