What are the key factors that drive the cryptocurrency market?
When a business tycoon and crypto influencer finalized acquisition of a popular social media platform, Dogecoin’s price jumped up from $0.07 to $0.16 in just 5 days. The main driving factor behind the sudden rise is that the business tycoon is a notable DOGE HODLer. Let’s rewind and go back to 2021. In May 2021, Bitcoin’s price fell by 10.6% in a day when a leading EV company announced about not using BTC due to environmental concerns. The cryptocurrency market is largely driven by hype and influencer activities around crypto/s. But, that’s not the only factor that triggers price swings in the cryptocurrency market – there are certain other factors as well.
If you want to take part in the cryptocurrency market, you need to understand how the market swings up and down. For that, you need to have a clear understanding of the factors that trigger or drive the crypto scene.
Factors that influence and affect the crypto market
Speculation and hype
What is one characteristic of the cryptocurrency market that has brought it both flak and kudos? Well, it’s simple- the market’s extreme volatility.
The cryptocurrency market lacks regulation at a larger level. As a result, speculation and hype takes a big place, causing extreme volatility in the cryptocurrency market. Hype is the reason why meme coins are enjoying high trading volumes today, despite no prominent use case. These coins will fade into oblivion after a few years and some other new hyped coin will replace them, if they cannot come up with a solid use case.
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Social media and online community forums play a key part in triggering speculation and hype about crypto. It creates a sense of FOMO among crypto investors, unleashing a feeling that if they don’t buy the crypto, they would miss out on a huge opportunity. The FOMO part eventually leads to an influx of investors towards the crypto, thereby increasing its demand and price in the cryptocurrency market.
The cryptocurrency market is flooded with thousands of cryptos, reaching over 20,000. But all are not priced equally. It’s because not all cryptos carry the same worth in the cryptocurrency market. A major factor that drives the worth of a crypto and price in the crypto market is its application benefits or use cases. Some coins are developed with a use case in mind. Over time, these cryptos automatically gain better market caps than cryptos that were launched mostly out of hype. Again, if the coins that were born out of hype can develop use cases over time, these coins too will start seeing a rise in value in the cryptocurrency market.
You have the example of Shiba Inu here. SHIB is essentially a meme coin. But now, the coin is entering the NFT world and also making a presence as an emerging payment system. Put simply, as of 2022 November, Shiba Inu is offering promising use cases. As a result, experts are optimistic that SHIB’s price will rise up to $0.000030 by the final lap of 2022 from the current (2022 November) price of $0.000010.
Cryptos that command a large community support generally show higher prices in comparison to those with a smaller community. However, the size of the community is not the sole factor here- the engagement level of the community also plays a huge role in the process. A crypto project might have millions of followers but low activity level. On the other hand, another crypto might have 50,000 followers but a highly engaged community. Despite a smaller size of community, it’s the second one that will attract higher prices.
An active and engaged community offers the vibe that a good lot of people are a part of the crypto project and want to talk about it. And, people mostly want to be a part of a project when they find something worthy in it. It’s such an ethos that will drive other people towards the crypto.
The crypto industry reached a peak of $3 trillion in 2021 from almost nothing just a decade back. The primary reason behind such a dramatic growth in such a short time is staggering interest in crypto and growing rate of adoption. The same philosophy works for individual cryptos as well.
In other words, rate of adoption is a major driver for the cryptocurrency market. Higher rate of adoption increases the price while a lower rate keeps the prices low.
Scarcity of a crypto is another crucial trigger in the cryptocurrency market. Following the law of economics, if an asset is scarce but commands high demand in the market, it will incur a solid rise in price and value in the market. The same works for the cryptocurrency market.
You have the example of #1 crypto- the Bitcoin here. BTC is a deflationary token that comes with a fixed supply. As a result, BTC’s value is only increasing and that too at an exponential level. However, scarcity alone does not pull up the prices. The crypto needs to have a sufficient use case as well to command high demand in the cryptocurrency market.
The cryptocurrency market witnesses a sharp decline in value in bearish market phases while an inspiring surge in the bullish period. It’s because market sentiments are in the negative in the bear mode while investors are always looking forward to working with crypto as soon as the cryptocurrency market enters a bull mode.
Notable events also play a part in triggering the price factor in the cryptocurrency market.
These events range from listing in a major exchange, influencer hype, major announcement by a leading holder of the crypto, and more. For example, if crypto is able to secure a listing in at least 1 leading exchange, the asset will see a rise in price. It’s because the listing will convey a message that the crypto is worthy enough to be embraced by an esteemed exchange.