Everyone knows the volatile nature of cryptocurrencies, but few are aware of the broad range of factors that lead to it. We’ve seen Bitcoin slow down with volatility spikes in the past years due to establishing itself as a safe and profitable asset. However, other cryptocurrencies are still prone to massive price shifts based on many other factors.
Meme coins, for example, are considered the least safe cryptocurrencies on the market. Most are created for entertainment and no real purpose, but that changes as meme coins become important for communities. From Dogecoin to Shiba Inu, we’ve got several meme-inspired tokens that reached popularity from simply being. The influence of meme culture and social media are some of the main aspects that influence the Shiba Inu coin price and Dogecoin value, but there’s more to what can influence crypto.
Scarcity
Some cryptocurrency projects have a limited supply of coins, while others strive for the unlimited. Eventually, these factors will affect prices by either increasing or decreasing them. When there’s a lack of cryptocurrencies, the value increases as there’s more demand. On the other hand, too many cryptocurrencies will not be as sought, so their value is lower.
For example, Bitcoin’s supply is limited to 21 million coins, and approximately one million are left to be released as the rest have been mined. This makes Bitcoin priceless on the market, considering the difficulty of mining one Bitcoin.
On the other hand, Ethereum has an unlimited supply that allows the continuous creation of the currency. This makes Ethereum an inflationary coin, so its value hasn’t exploded like Bitcoin’s did. However, it was established through innovative technologies like smart contracts, which made it a reliable solution.
New projects
Although cryptocurrencies don’t influence each other directly, when new projects enter the market, they impact prices. Growing liquidity and shared value lack a continuous cycle, but it’s usually part of the altcoin movement, in which the value of altcoins has overtaken that of Bitcoins.
Therefore, when no new projects enter the market, the ecosystem reaches stagnation. However, organizations behind cryptocurrencies are always evolving through development roadmaps, such as:
- Ethereum progressively improves security, user experience and future-proofing;
- Solana integrates its backend development with Rust, Solana Web3.js, and the Anchor framework;
- Dogecoin focuses on its utility and ecosystem through a library for developers and special wallets for users;
Legal frameworks
Regulations are crucial for making cryptocurrency and blockchain secure, but they can also support innovation or hinder it. Given how many governments are skeptical about the use of decentralized assets and ecosystems, it’s no wonder they took so long to create an appropriate legal framework.
In some cases, legal actions can bring a project down, such as the SEC taking Ripple to court. The disadvantageous brand image has affected the XRP price, but once the case was settled and Ripple won, prices went on a bullish run.
Other times, a legal framework can support innovation by allowing startups to create. For example, the EU established the MiCA regulation, in which crypto-based companies, such as exchanges or blockchain-oriented companies, could operate by earning a license. These organizations must also audit their business frequently and ensure customer data is secured.
Economic outlet
While many consider cryptocurrencies not to be affected by external factors, the investors and traders leveraging them are still living in a world of financial uncertainty. Therefore, it’s understandable that when they step down investments during an economic turmoil due to inflation or unemployment, this eventually affects the crypto market.
Considering that such problems have become a global concern, especially with the numerous global disputes, investors should expect the crypto market to be more exposed to real-world factors since it strives for adoption.
Hence, it’s always best to be wary of the latest news to adequately change investments for a safer landing. Choosing stable crypto projects by market capitalization is more important than new projects whose value can fall.
Market capitalization
Cryptocurrency market capitalization is known as the total value of the coins that have been mined. Users can calculate it by multiplying the number of circulating coins by one coin’s market price. Therefore, the market cap can fluctuate, but not considerably based on the increasing number of coins mined.
There are three categories of crypto market capitalization:
- Large-cap cryptocurrencies include those with a value between $1300 billion and $390 billion (Bitcoin, Ethereum);
- Mid-cap cryptocurrencies have a lower valuation, between $1 billion and $10 billion (Hedera, Algorand);
- Small-cap cryptocurrencies have a market value under $1 billion;
Large-cap cryptocurrencies are considered the safest, so most investors and traders choose them for portfolio establishment. Mid-cap cryptocurrencies are usually the most interesting when investing in development, but they’re less stable. Finally, small-cap cryptocurrencies are prone to dramatic price swings due to their newness in the market, so they’re the least likely to be considered for a long-term and stable portfolio.
Fear and greed
The Fear and Greed Index is investors’ most valuable tool for determining market conditions. It gathers important data on how users feel about the market, which implies their next movement.
The indicator goes from extreme fear, showcasing worry among investors, which is considered a buying opportunity, to greediness, which means the market is due for a correction.
While it’s a useful indicator for the majority of investors, it unfortunately shows that many are making decisions based on feelings and fears rather than research and patience. This is why there are moments when they sell most of their assets out of FOMO (fear of missing out) or buy low-cap cryptocurrencies for the same reason, considering they’re building wealth.
Final thoughts
The cryptocurrency market offers numerous opportunities and benefits. However, its volatile nature requires investors and traders to watch out for every factor that can interfere with the assets’ value and adapt their strategies. From the scarcity of coins to the new projects entering the ecosystem, cryptocurrency prices can increase or decrease without much warning. Even the economic outlet and market sentiment contribute to changing values.
