Cryptocurrencies are not supported by a product with a collateral or base value. There are various differences between the prices of cryptocurrencies and fiat currencies. The most important of these is that fiat currencies are supported by central governments and declared legally. Basically, the value consists of the value that the government sets for a transaction and the trust of both parties to this value.
Today, most countries operate a fiat currency system in which central banks control the money supply in their reserves and are controlled by indirect inflation.
Cryptocurrencies are mostly decentralized and not controlled by any central government or by any authority. Supply determines the price of the cryptocurrency.
There are similar features between cryptocurrencies and fiat currencies. The main example is that both are used as a means of exchanging products and services. Both have store of value functions.
Why are the prices of cryptocurrencies so fluctuant?
The most concrete reason is that the market is still very new. There are still a lot of people who have not heard this term and are unaware of the industry.
The total value of fiat currency circulation is around $90 trillion, while the market value of the cryptocurrency is around $ 240 billion. Considering the difference, cryptocurrencies will inevitably be the center of attention.
All these reasons naturally make the market too volatile and make it almost impossible to predict cryptocurrency prices. On the other hand, considering the future benefits of technology, it increases confidence in cryptocurrency in the long run.
New members join the cryptocurrency market day by day. At the beginning of 2018, it was announced that there are 100,000 new users every day. As these members join the market, the market is expected to grow further and volatility will gradually decrease. Naturally, cryptocurrencies will become more reliable in the future due to its technology and the fact that it is peer-to-peer.
Last but not least, price manipulation is quite common for the developing market. Central cryptocurrency exchanges control most of the flow. By manipulating cryptocurrency prices artificially, they change the displayed price feeds to increase their revenue, making traders to trade panic. Furthermore, it is almost impossible to prove and control price manipulations in such unregulated markets.
What determines the price of cryptocurrency?
What determines the prices of cryptocurrencies is based on a basic economic principle. It can be said that only the supply determines the price of cryptocurrencies. If the supply of a cryptocurrency is limited and the demand is high, it will naturally increase the value of the cryptocurrency. Likewise, in the case of a high supply and low demand, there is a decrease in the value of that cryptocurrency.
For example, the total number of Bitcoins is limited to 21 million BTC. While demand has increased in recent years, Bitcoin has been on the rise for 10 years as a result of the fact that total supply has not changed.
Media and public sentiment play a major role in the rise and fall of the price of cryptocurrencies. The positive and negative news produced by the media cause sharp movements in cryptocurrency prices. If the cryptocurrency has a high profile and receives good media support, it is inevitable that the price of that cryptocurrency will rise. Likewise, as a result of negative news and low PR, the value will decrease.
Investment information, comments and recommendations contained herein are not included in the scope of investment advisory. Therefore, making an investment decision based solely on the information and comments contained herein may not produce results that are in line with your expectations.