What Are The Factors Affecting the Price of Cryptocurrencies?

Unless you’ve been living under a rock, chances are you’ve probably heard of the recent cryptocurrency boom.

From Ethereum to Bitcoin and Litecoin, the demand for crypto has risen immensely since the 2016 crypto bull run that saw millionaires being minted overnight.

What was once regarded as being a mere fringe currency that was used on the deep web has become a mainstream asset, eventually potentially becoming a type of alternative to stocks and gold.

Ironically, cryptocurrencies do not have any actual physical presence in the real-world. Unlike fiat currencies that are printed and issued by central banks, cryptos exist only in the digital realm.

They are stored on what is known as digital wallets that can either be software or hardware-based.

A key characteristic of cryptocurrencies is that they are entirely unregulated and decentralized. Cryptos are highly volatile investments that are traded 7 days a week, around the clock.

Despite all of this, cryptocurrencies have proven to be a highly popular investment. As we enter into 2021, we have been seeing a resurgence in demand for the cryptos of all kinds.

Let’s take a look at factors that drive the crypto market up (or down).

1. Market Sentiment

2020 has proven to be quite a year for just about anyone. Mass layoffs, a global pandemic, and America’s most divisive election yet have sent shockwaves throughout the world.

While the global economy may have been in shambles, this hasn’t stopped the U.S stock market from reaching new heights in 2020. Part of this can be attributed to the fact that the U.S Federal Reserve i.e. The Fed has been printing money at an unprecedented rate in an effort to inject liquidity into the economy.

With an excess supply of cash in the United States, investors have been scrambling to get ahead of what some may fear will be rampant inflation. Hence, in an effort to hedge the value of their assets, investors have been snapping up assets such as stocks and cryptocurrency.

Because of this, we’ve seen how despite a weak economic outlook, the stock market remains stronger than ever.

The same can be said of the cryptocurrency boom in late 2020 and early 2021. With the U.S Dollar anticipated to be weaker in 2021, cryptocurrency is seen as a form of digital gold. As it is unaffected by government regulations and inflation, exchanging dollars for Bitcoin, Ethereum, or Litecoin is a valid investment strategy.

Hence this is why we’ve been able to see an increase in demand for cryptos in 2020 that has driven up prices.

2. The Legitimization of Crypto Investments

The 2016 crypto boom was largely driven by retail investors looking to get aboard the crypto train. In the past, cryptocurrencies were typically viewed as highly volatile assets with no tangible value or worth.

Because of this, more casual investors would typically choose to avoid even mainstream assets such as Bitcoin or Ethereum.

However, the recent 2020 bull run that saw crypto prices break new ground is likely attributed to the entry of large institutional investors into the market. These investors bring with them millions of dollars in investment and legitimize the status of crypto assets as a viable investment.

As can be seen by Bitcoin’s dramatic rise in price along with that of other altcoins, this new paradigm shift is likely here to stay for the time being.

4. Bitcoin’s Successful Halving

Prior to the 2020 shutdown and a successful halving, Bitcoin prices remained relatively stagnant as it struggled to break through the $20,000 price ceiling.

Halving is an event that occurs once every 4 years in which Bitcoin rewarded to miners for each successful validation is cut by half. While it may seem like a bad memory now, prior to the halving, many feared that the Bitcoin market would bottom out with investors abandoning the cryptocurrency.

Fortunately for us, this proved to be mere conjecture as following a successful halving, demand for Bitcoin and other cryptos has risen. This could be due in part to the perceived stability of Bitcoin and its viability as an investment.

2021 is set to be an exciting year for Bitcoin and other cryptocurrencies. Increased investor interest and new developments in technology will propel the crypto market further forwards.

For further insights on the reasons why cryptocurrency value oscillates, read this piece from the Tezro blog: https://blog.tezro.com/cryptocurrency-value/

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