Blockchain technology has allowed us to change the way we buy, sell and trade cryptocurrencies. It provides a safer way for these exchanges and is much faster than any transfers with fiat money. Yet, cryptocurrencies are still a mystery for some people, while others doubt their performances, even though there’s plenty of information regarding their usage, trading methods, and more.
The blockchain has yet to be discovered, as investors and developers have not completely spotted its potential. But this industry has a lot to offer, which is why the number of cryptocurrencies is increasing by the year, of which Bitcoin, Ethereum, and Dogecoin are the most known coins.
If we got you interested, here’s what determines the price of crypto for buying digital money!
Supply and demand
Economics applies in the world of cryptocurrencies too. Here, the theory supports the fact that a price increase is determined by the short supply of a coin or the high demand for it. So, if you want to buy crypto, you’re basically competing to offer higher prices. Meanwhile, the price is supposed to fall when the demand is low for a cryptocurrency, and there’s an abundance of it on the market.
Yet there’s still a problem with the crypto supply and demand because most coins are limited by a maximum supply, which determines the total amount of each crypto coin that will ever exist. Let’s take the example of Bitcoin, which has a limited number of 21 million coins, and there are already 19 million bitcoins issued. After the maximum number is reached, there won’t be any new bitcoins issued, meaning miners won’t have the same benefits as now (it is expected they’ll only earn profits from transaction processing fees). While the protocol of Bitcoin can’t be changed, other cryptocurrencies provide users with the same earning opportunities.
Overbuying vs. overselling
Another factor linked to the supply and demand law is overbuying and overselling cryptocurrencies. These two situations arise when investors are excited or not about a particular coin because they’re motivated by the purpose of that cryptocurrency or its media recognition. In other words:
- When people are trading below true values, the supply is greater than the demand, which means there’s an overselling phenomenon. So, more people want to sell than those who want to buy, and the price falls.
- When people are trading above the true value of a cryptocurrency and the demand is greater than the supply, this is known as overbuying. Sometimes, traders don’t want to miss out on easy profit and rush to purchase, even if the prices are rising.
If you want to get more in-depth on how to buy cryptocurrency, you should get familiar with using a crypto exchange, selecting a preferred storage method, and exploring the market to observe how it behaves and fluctuates.
Volatility vs. equilibrium
There is a situation where supply and demand are the same, bringing market stability. Although the market is usually volatile due to being influenced by investor and user sentiments, media hype, and supply and demand, a crypto equilibrium is hard to reach as crypto markets are relatively young.
Equilibrium would stabilize the price of crypto, which investors wouldn’t want now because even if traders sometimes risk their assets, they’re also supposed to gain higher rewards when the volatility hits the right spot.
The problem with market volatility is that news and speculations fuel price swings in crypto. Because they have less liquidity than traditional financial markets, the final effect is sometimes negative, which is why you shouldn’t base your actions on the news and media.
The value of a cryptocurrency is also determined by how easy or difficult it is to produce it. For example, Bitcoin has a high cost of production, meaning that you’d need expensive hardware and a lot of energy consumed to mint bitcoins. Lately, the production cost of Bitcoin has dramatically fallen as miners struggled with the bear market, and this has negatively impacted Bitcoin prices. Mining Bitcoin is also wasting a lot of energy, which is why new cryptocurrencies are saving more energy and looking for better green mining practices.
Ethereum is one of these blockchains that is going to change its old proof-of-work system to a proof-of-stake one, making it easier for users to mine and earn coins, as well as use less energy. You won’t need the latest CPUs and GPUs to mine successfully. There’s also SolarCoin, which creates one coin for every Megawatt generated from solar technology ―users upload documentation to prove energy generation, and they’re rewarded with Solarcoins.
A node is basically a computer connected to a network that validates transactions. The node count shows how many active wallets are on the network, which indicates the fair price of a cryptocurrency when compared with the total market capitalization.
A node is different from a miner because:
- A node is a computer that’s constantly running the crypto core that enables computers to download and store coins. They’re the replacement of a central entity.
- A miner is a computer system that adds new sets of transactions to the blockchain and generates new coins.
A strong crypto community is able to get through a crisis because nodes are the ones who contribute to the security of the network. More nodes mean more safety because they ensure the users and miners are not trying to trick the system. At the same time, when more people choose to run nodes, they help the network be more decentralized and censorship-resistant, contributing to the price of a cryptocurrency.
When investing in any cryptocurrency, it’s important to be aware of the risks of buying and selling at the wrong time. That is why you should know the market thoroughly before making any transactions and investments. But luckily, the market is volatile enough for users to gain confidence and earn high rewards, and nodes are contributing to a healthy blockchain system that can influence the prices positively.