One of the defining characteristics of cryptocurrencies, which is known even to those with no expert knowledge about this asset, is volatility. The price of a cryptocurrency can fluctuate within the wildest spectrums, which makes its further movement highly difficult to predict. However, if you know what market factors and other determinants can affect the prices of cryptocurrencies, the task of their further calculation becomes much easier.

In this article, we'll take a closer look at some of the most significant factors that drive the value of crypto and how they impact crypto markets.

Supply and demand

This answer is probably the most obvious when it comes to market factors that affect the price of anything. Regardless of which asset we are talking about, if you say that its price movements are influenced by the economic laws of supply and demand, you would not be wrong. However, in the case of crypto, this group of factors is particularly significant. Since the vast majority of cryptocurrencies are generated via highly specific procedures based on blockchain technology and deprived of any apparent intrinsic value, supply, and demand affect their price much more significantly than other assets.

Thus, in the absence of real-life resources that support the price of crypto, tying it to fiat indicators through a common denominator, the ratio of trading volumes to public demand plays a key role in determining crypto prices. As a result, the common rule is always relevant: when demand for crypto exceeds supply, its price rises, and vice versa; if a crypto is available in abundance while the demand for it is low, its value goes down.

Inflation and general economic sentiment

Although cryptocurrencies have been designed to develop outside the classical economic paradigm, creating an alternative ecosystem, various economic factors still affect the price movements of coins. This correlation is most obviously manifested under the influence of inflation, which term denotes a decrease in the purchasing power of fiat currencies. In conditions of high inflation, investors often pay attention to cryptocurrency as a kind of hedging tool against this unfavorable economic process to protect their funds when the value of fiat decreases.

The absence of inflation and generally positive economic sentiments can also affect the value of cryptos. Thus, if investors have a positive outlook on the economy, they may be more willing to invest in a broad range of new assets like cryptocurrencies, increasing in demand and prices. Besides, under such conditions, investors have more resources to explore new assets. At the same time, in times of crises or recessions, the demand for cryptocurrencies may decrease since, in such cases, investors are more inclined to focus on preserving their wealth rather than multiplying it.

Regulations

Today, crypto is one of the least regulated assets out there. Since its dawn, cryptocurrencies have attracted numerous enthusiasts precisely because of their decentralized and deregulated nature. Over time, however, the need for increased regulation at the level of individual states or entire regions became apparent. Although one may think that 100% of regulations are intended to restrict crypto-related activities (which, in turn, may well lead to a decrease in the attractiveness of cryptocurrencies), this is not always the case.

For example, if a certain state legalizes cryptocurrency at the highest level (as, say, El Salvador did by granting Bitcoin the status of legal tender in September 2021), new opportunities for crypto investors arise, which entails a rise in crypto markets and an increase in the price of cryptocurrencies. On the other hand, restrictive regulations, such as the 2021 ban on crypto transactions in China, could force global crypto prices to go down. Therefore, regulations can have a wide variety of effects on crypto pricing.

Mainstream adoption

In its heyday over 14 years ago, crypto was only interesting to a narrow circle of enthusiasts and tech nerds. Today, it is rapidly being adopted, gradually winning its place alongside fiat currencies. Adoption has a completely logical consequence in the form of an increase in the price of cryptocurrencies because the more spheres of application of cryptocurrencies there are, the greater their value. When businesses and institutions start accepting cryptocurrency as a means of payment, it increases demand for the currency, hence launching the supply-demand dichotomy discussed above.

Besides, mainstream adoption brings credibility and legitimacy to cryptos. This makes them more reliable in the eyes of the investors, which has an undeniable positive impact on their value as well. In recent years, there have been numerous examples of how adoption affects cryptos. For instance, in 2021, Tesla announced its intention to allow Bitcoin as payment for its goods, which led to a more than 20% increase in the price of BTC.

News and info drives

Cryptocurrencies are an asset that appeared at the peak of the information age. Therefore, individual coins are particularly susceptible to the influence of the hottest info drives concerning them. If positive news about a cryptocurrency appears in the official information space or on social media, more people want to buy it, which increases demand and makes the price soar.

For example, in 2019, Dogecoin skyrocketed after Elon Musk made several favorable statements about it on social media. Conversely, when eco-activists published reports that crypto mining harmed the environment a few years ago, the value of the top cryptocurrencies mined by mining fell. While other assets are also affected by the news, crypto can swing within a much wider range of volatility, given that real-life resources don't back most coins.

Geopolitical events

This point is somewhat similar to the previous one; however, we highlighted it separately because, unlike news and info drives in general, geopolitical events can affect crypto markets even if, at first glance, they have nothing to do with any coins. Instead, geopolitical turbulence can affect crypto indirectly through things that become apparent after the fact.

For example, protests in Kazakhstan that took place in early 2022 led to a decrease in trading intensity and a drop in the value of Bitcoin because this country was home to one of the largest crypto mining communities in the world. As mining halted for the duration of the protests due to a variety of factors, including massive internet outages, investor sentiment for Bitcoin declined significantly, sending its price down. Thus, high-profile geopolitical events, even those seemingly unrelated to cryptocurrencies, can cause considerable crypto price movements.

New technologies

Crypto is a direct product of innovation and global digitization. Therefore, the emergence and development of new technologies have a direct impact on their price dynamics. As new developments are made in blockchain technology, cryptocurrencies can become more efficient and secure, which may result in an increase in demand and value. For instance, as the technology of smart contracts emerged, allowing the development of decentralized apps (DApps), a whole bunch of new cryptos was created, this time having a utilitarian purpose in addition to merely being innovative payment means. This, in turn, rose demand for cryptos, making a set of digital currencies surge.

For example, as Ethereum's smart contract capabilities developed and its ecosystem started being used for the creation of DApps, this coin’s price rose significantly. Similarly, the development of Cardano's proof-of-stake consensus mechanism has led to increased interest in this coin, making its price soar upon the innovation’s introduction. Overall, blockchain technology developments, along with innovations related to other spheres, play a critical role in shaping the value and trajectory of cryptocurrencies.

Wrapping up

Although cryptocurrency prices are unpredictable and affected by extreme volatility, they are not illogical. The value of both individual coins and cryptocurrencies as an asset group is determined by the influence of various market factors. Some of them are universal for different types of assets: supply and demand, inflation, news, and geopolitical events. Other factors are unique to cryptocurrencies: new technologies, mainstream crypto adoption, and new crypto regulations. If you keep these factors in mind and regularly monitor them, the probability that you’ll be able to buy crypto in the most favorable conditions and catch the best moment for a crypto transaction will increase significantly.

Disclaimer: Our content does not constitute financial advice. It is only intended for informational and educational purposes.