As well as any other currency, also cryptocurrencies are based on people’s trust. The value of cryptocurrencies is not backed up by anything and it purely depends on the people’s will to invest their money in virtual currencies. The price of each individual cryptocurrency is primarily dependant on the supply and demand in the market.
The amount of electricity used for running blockchain can be immense, for example, running blockchain can consume as much electrical energy as a small town. That’s why the price of electricity has a considerable influence on the final rate.
Difficulty of mining
The difficulty of mining influences the price of mining, or more precisely the cost of mining (price of electrical energy + price of hardware + etc.).
Usability of a currency
The usability of a cryptocurrency is the key factor influencing the price. Why would you have „something“ you can never use? Cryptocurrencies are primarily used for payments and as an investment opportunity. However, there are also other applications, for instance, Ethereum can be utilised for so-called „smart contracts“, which raises its price.
Public perception of the value
The public opinion on a particular cryptocurrency influences its value, or rather it influences people‘s will to buy or sell the currency, which influences its price. Public opinion has an impact on all factors described in this article, it’s most likely the media news which has the greatest influence on the public.
Media news influences the public opinion, which may have both a positive and negative impact on the exchange rate development. In some cases, the influence can be even deliberate because many publicly known people directly trade with cryptocurrencies or they are a part of companies which speculate with them.
As an example, on Sep 12, 2017, Jamie Dimon Co. Chief Executive of J.P. Morgan bank issued a statement about overestimating BitCoin and claimed that BitCoin is a currency for drug dealers and murderers and forecasted its collapse. Consequently, the BitCoin price dropped and J.P. Morgan was charged with the market manipulation. Some sources also claim that J.P. Morgan itself trades with cryptocurrencies and that Jamie Dimon let the company earn the profit, the case is still under investigation.
As well as a change in the value of the US dollar influences other currency exchange rates, also the BitCoin price usually influences other currencies. You might say that BitCoin is a sort of dollar among cryptocurrencies.
Large-scale investors have sufficient funds which enable them to manipulate the price on the market. It is easier to do so at less-known cryptocurrencies than at the popular ones. How can it work in practice?
- An investor buys a large volume of a less-known cryptocurrency and tries to medialise its advantageousness to lure other investors and raise its price. The currency is subsequently sold.
- An investor buys a cryptocurrency, which increases its price, that lures other people to make a purchase and that leads to another increase in price. The currency is subsequently sold.
- A sudden sale of a large volume of a cryptocurrency results in the price drop and the investor can profit again.
Pre-mining the currency
Developers of new cryptocurrencies can possibly pre-mine most of the currency for themselves and try to present it as the newest and the best technology in the field of cryptocurrencies. Unfortunately, this is usually a fraud and most of the pre-mined cryptocurrencies don’t bring anything new and just aim to let programmers earn money on people’s trust. Such frauds are hard to uncover and that’s why it is extremely difficult to start a new cryptocurrency as it doesn’t have the investors‘ trust.
Restrictions and official currency recognition
Government restrictions on using cryptocurrencies lead to reducing its value. Of course, it depends on how important is the specific market where the currency was banned. On the contrary, if a cryptocurrency becomes a state‘s official currency, its price will rise. Again, it depends on how important the country accepting the currency is.
Conclusion of the article
Cryptocurrency prices are based on the difficulty of mining and the size of demand, the price is therefore created as with any other product. The dependency of cryptocurrencies on investors‘ trust cannot be overlooked, the trust in the currency is absolutely crucial and I consider it the main factor influencing the demand and consequently the price.