Cryptocurrencies, like stocks, commodities, and securities, are transferable assets. Their price is determined by how much interest there is in buying them on the market ( demand) and how much is available to buy ( supply). Their relationship determines the price.
After all, cryptocurrencies have been around for a while. The most crucial factor was the financial principles of demand and supply theory. Experts, on the other hand, use technical and fundamental analysis to make better price predictions.
Still, crypto is regarded as one of the riskiest investments because the price can fluctuate dramatically, giving investors a greater chance of either making a significant profit or losing their money.
Economic stability, which is currently lacking, increases the appetite for risky investments. As a result, when investors have a lot of money, it goes into cryptocurrency and vice versa.
Price Determined by Supply and DemandÂ
The mining process is linked to the supply of cryptocurrency. Because crypto mining is limited and complex, the price of some crypto coins remains relatively high. On the other hand, demands are determined by an investor’s mood when making risky investments.
The market is highly volatile due to the high volume of cash flow, and traders’ transactions cause the price to move quickly. Because this is the primary driver of the cryptocurrency movement, traders’ willingness to engage in risky trades is the primary driver of their volatility. Furthermore, investors withdrawing funds from the cryptocurrency market cause a drop in demand, which significantly impacts the coins’ value.
Alfred Marshall developed the market supply and demand theory in determining prices in 1890. Supply and demand can affect the price of any product, which is known as a macroeconomics theory. So, when the economy is doing well, and there is plenty of cash, demand for products and commodities rises, and investors are more likely to make risky investments.
When there is a surge in demand for cryptocurrencies, prices skyrocket. As a result, more people enter the market, increasing demand even further. When the table is turned upside down and negative economic news is released, investors begin to withdraw their money from the market and place it in safer investments.
However, one of the issues confronting the crypto market is trustworthiness. The bankruptcy of FTX has cast a shadow on the market recently, driving some coins to low levels not seen in a long time. As a result, because trust is one of the most critical factors influencing investor decisions, it could significantly impact demand.
Unsurprisingly, demand creates a price spike. On May 7, 2021, the all-time high price of Dogecoin was $0.64. Dogecoin was a hot topic among market traders at the time. Elon Musk’s Twitter posts urged people to bet on the coin to profit from price increases. However, after the pick on May 7, the bubble burst, and the price plummeted; the traders left and stopped holding Dogecoin, resulting in a price drop of over 1,000%. This demonstrates how something worthless can become valuable if enough people want it.
The supply and demand theory has been used throughout history. Various factors specify the demand and supply of commodities, products, or crypto, making it one of the oldest theories today.
Crypto Prices in Supply and Demand Curves
Miners create new coins by solving math problems with special software and mining currency. This is known as “crypto mining.” Any fees incurred when using cryptocurrency as a form of payment on the web are borne by the sender of funds.
The greater the number of people who want to use cryptocurrency as a form of payment, the greater the demand for it. This makes it more challenging to create new coins because they must be mined faster to meet increased demand.
Because cryptocurrency is so new, many people hesitate to invest in it. Many people are concerned about investing in cryptocurrency because it is so new and volatile, but they also want to profit from it.
This fear is what keeps cryptocurrency prices low. If people were less afraid to invest in it, they would make more money and drive up the price. The number of shares available for trading on the stock market is limited. Because you can’t just go out and buy more of these shares, the scarcity of supply helps keep their value high.
As mentioned by an expert at Qumus AI, there is a nearly limitless supply of cryptocurrencies because new ones can be created anytime.
Cryptocurrency has grown in popularity recently due to its ability to conduct secure and anonymous transactions. Cryptocurrency is a digital or virtual currency that employs cryptography to secure transactions and control the creation of new units. Investing in cryptocurrency is becoming increasingly popular due to the potential for large profits. As with any investment, you must consider whether cryptocurrency’s price will rise or fall before investing. Supply and demand determine the price of any stock. Because the cryptocurrency has a limited supply, the yield cannot grow indefinitely.
Byline: Hannah Parker
