Buddy Cuan may understand that the price of cryptocurrency is quite volatile.
But actually, the price movement did not happen suddenly. Like other assets, the seesaw of the value of cryptocurrencies also depends on the demand and supply mechanism.
But, what are the factors that influence the demand and supply of crypto assets? You can read the explanation below.
Factors Affecting Cryptocurrency Prices
1. Production Cost
The direct costs and opportunity costs of producing coins are the main factors in determining the price of cryptocurrencies.
One of them can be seen in Bitcoin. This crypto asset pioneer is known for its high mining fees because miners must have sophisticated computers with complex processing power.
In addition, Bitcoin mining also uses a large amount of electricity. According to Cambridge University research in early 2021, Bitcoin mining worldwide consumes 121.36 Terawatt-Hours (TWh) of electricity. In fact, Bitcoin mining consumes more electricity than Argentina.
No wonder, if the cost of production is reflected in the current price of Bitcoin.
2. Blockchain Technology
The demand for a crypto asset will soar if the crypto community takes advantage of the blockchain technology that is the home of the cryptocurrency. As a result, the price of crypto assets will also increase.
There are various reasons why the crypto community swarms over a particular blockchain technology. But usually, the three main reasons are better transaction scalability compared to other blockchain technologies, the emergence of new features, and the low transaction costs of utilizing the technology.
3. Mass Adoption
If a coin is adopted en masse, then its value can increase rapidly. This is because most cryptocurrencies have a limited supply, so an increase in demand will certainly raise the price.
It’s just that, to be mass-adopted, cryptocurrencies must have benefits that can be applied in real-world conditions. For example, one coin can actually be used as an everyday means of payment.
So far, cryptocurrencies such as Bitcoin have been adopted by institutional investors as a means of storing wealth. Therefore, the price had increased and touched the point of US $ 63,000 per chip in early 2021. In addition, El Salvador also plans to use Bitcoin as an official means of payment in the country.
4. Fiat Currency Inflation
The demand for cryptocurrencies will increase if inflation against fiat currencies rises. So, it will raise the price of the crypto asset in the future. What is the reason?
Cryptocurrency prices, especially coins that function as a store of wealth such as Bitcoin, are known to be assets that are not correlated with inflation. So, investors can use it as an instrument to protect wealth from the erosion of fiat currency values.
5. Government Regulation
Government policies greatly affect the demand for cryptocurrencies which can then affect the price.
If the country allows the use of cryptocurrencies as a medium of exchange, the demand will increase. On the other hand, restrictive government policies on the use of cryptocurrencies will weaken the demand and then the price.
How do you Deal With Price Volatility?
Cryptocurrency price movements are fairly fast. This, of course, can’t be avoided. So, what you need to do is have the right attitude in dealing with it.
What kind of attitude do you need to take in the face of fluctuations in the price of crypto assets?
1. Avoid Trading or Investing Cryptocurrency Using Emotions
Information can be scattered in the crypto universe. Unfortunately, not all information has a positive impact. You are very likely to be exposed to rumors that only cause panic and make you make wrong decisions in playing cryptocurrency.
So, what you need to do is get to know the coin you are holding. If you believe that your crypto assets have future use value, then you don’t need to panic when there are rumors or mass sell-offs in the market.
In addition, you also need to multiply references about the reasons why the price of your coin goes up or down quickly.
2. Know Your Risk Tolerance Limit When Trading or Investing in Cryptocurrency
All cryptocurrency market participants certainly want big money. However, not all of them are ready to suffer losses from cryptocurrency exchange activities. Panic can hit you even though the price of the coins you hold only drops 0.01%.
So, therefore, you have to think about your risk tolerance limits. At what price level will you release the coins you hold? How much loss can you tolerate?
3. Mitigating the Impact of Price Fluctuations with Diversification
You must have always heard the phrase “Don’t put all your eggs in one basket”, right? You should also embrace the same thing when trying to swim in the cryptocurrency pool.
Crypto asset prices can swing rapidly and greatly affect the value of your portfolio. However, you can provide a “safety cushion” for that risk by diversifying your assets.
4. Most Important Thing: Make Peace with Price Fluctuations
Before setting foot on the cryptocurrency scene, you should be aware that high price fluctuations are absolute. There are times when the price goes up, but there are also times when the weather looks cloudy.
In addition, you also need to realize that profit and loss are common in trading and investment activities. So, mentally prepare first before plunging into the cryptocurrency scene, Sobat Cuan!