Cryptocurrencies are tradable digital assets. As a digital tradable asset, cryptocurrency prices and value are determined by how much interest people have in that cryptocurrency (known as demand) and how many of those cryptocurrencies are available on the market (known as supply).
To become a successful trader, one of the most important skills to have is an understanding of how demand and supply affect the price of cryptocurrencies. Knowing this will help one know when crypto is set to have a bull or bear trend in the market.
In this article, you will get exclusive coverage of demand and supply in the crypto market and how both combine to affect the price of cryptocurrencies. You will also get a quick overview of other factors that might affect the price of cryptocurrencies.
Many factors affect the price of cryptocurrencies, but supply and demand stand out from the rest.
Supply and demand stand out as the most prominent and long-term factors determining the price of cryptocurrencies. For example, if crypto users are not interested in buying a coin, its demand falls, leading to a bearish trend in its price. Due to the essential nature of supply and demand, everyone seeking success while trading cryptocurrencies needs to learn how it works.
Some of these other factors, including regulations, other competing cryptocurrencies, and media hype, can also affect the price of cryptocurrencies.
Although many people are calling for the crypto industry to be regulated, there are numerous effects on cryptocurrency prices. In recent times, after unfortunate incidents such as the FTX and Genesis collapse, the agitation for more regulation has increased.
Nevertheless, government regulatory policies can both positively and negatively impact the price of cryptocurrencies. For instance, when the government of a country such as China bans cryptocurrencies, it can easily impact the price of cryptocurrencies negatively. The same thing happens when a country’s government approves the use of cryptocurrencies: it brings a bullish trend.
Furthermore, competition among cryptocurrencies can affect cryptocurrency prices—usually negatively. For instance, because of the huge fee the Ethereum network charges, many crypto users have switched to the Solana or BNB Chain; this reduces the value of Ethereum. In other cases, the creation of Shiba Inu as a rival of Dogecoin has had an incredible impact on the price of DOGE.
Finally, social media hype can also be a major factor affecting the price of cryptocurrencies. The hype on several platforms can drive crypto enthusiasts to invest money in a project. Especially on Twitter, crypto project developers know that social media hype is indispensable for the success of their various projects.
The law of supply and demand goes back to an old economic theory, which subsequently applies to increasing or decreasing crypto prices. As the law says, any cryptocurrency that is scarce in the market will increase demand and most likely drive the price higher. Subsequently, any cryptocurrency that crypto traders demand in the market is more likely to be higher in price.
For example, Bitcoin is created so that it becomes scarce over the years, causing its price to increase as the years go by. The developers of Bitcoin designed it so that the creation of new bitcoins is reduced by half every four years; this is called halving.
In other words, demand is when crypto enthusiasts are very interested in a particular cryptocurrency, while supply is how much of the cryptocurrency is available. In most cases, cryptocurrencies whose supply is very large and easily accessible have lower prices. In comparison, those whose supply is very scarce or low have a much higher value and price in the market.
Cryptocurrencies have a circulating and maximum supply, which also plays a role in determining the price movement of cryptocurrencies. The circulating supply of a cryptocurrency is the number of that cryptocurrency that is available and accessible to the public. The circulating supply of a cryptocurrency can increase or decrease depending on how the cryptocurrency’s developers designed it to work. For instance, the circulating supply of Bitcoin is designed in such a way that it will continue to increase until it reaches its maximum supply of 21 million.
On the other hand, the maximum supply of a cryptocurrency is the highest number of that cryptocurrency that can ever be created. This means that once that number is reached, the cryptocurrency won’t be created using any method. For example, Bitcoin has 21 million as its maximum supply, so if 21 million Bitcoin is reached, no more Bitcoin will be created again.
Like other assets, supply and demand affect cryptocurrencies in many ways, mostly their price and value.
If a cryptocurrency has a lot of people asking to buy it in the market, its price tends to rise compared to another that is being bought by others. Alternatively, if a cryptocurrency is in low demand in the market, its price is more likely to fall.
For example, a new token known as Bonk was in high demand in January 2023, and its price skyrocketed. Many traders were scrambling to buy this token, causing its price to increase because of the high demand. However, as time passed, the demand for the token decreased, leading to a massive loss in the market.
This same theory applies to other cryptocurrencies on the market, including apex cryptocurrencies like Bitcoin and Ethereum.
Now that you have a better understanding of how demand and supply work, the next best thing to know is where you can trade this information.
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