- The three primary factors that drive crypto value are: supply and demand, market perception, and competition.
- Most cryptocurrencies implement mechanisms to limit supply and prevent inflation.
- Market perception is closely related to market value. The higher one’s market perception, the more one is willing to pay for it.
Although cryptocurrency is well-known for its value and the technology backing its existence, another defining characteristic is its volatility. Even when trading the largest and most established cryptocurrencies, such as Bitcoin, it isn’t rare to see crypto going up or down 5%, 10%, or 15% on any given day.
If you’ve ever asked yourself questions such as “What makes crypto go up and down” or “When will crypto go back up,” here’s a brief explanation of how crypto markets function.
Why Does Crypto Go Up and Down?
The primary aim of cryptocurrencies is to serve as a fully digital and decentralized currency with no backing from a central government or authority (fiat money, e.g., U.S. Dollar).
The appeal of non-government currencies, such as a crypto currency, is that they are separated from the control of and the reliance upon the backing of a centralized authority. However, this disintermediation also removes the theoretical stability provided to a currency by a governmental authority and the backing of that currency by the actual economy of a nation state. Without this backing, cryptocurrencies do not, and should not be expected to, trade in the traditionally more stable manner of fiat currencies.
Since very few commercial outlets and entities worldwide accept cryptocurrencies for typical purchases, they tend to trade more like speculative assets than traditional fiat currencies that have state backing and widespread commercial use cases.
Three primary factors drive crypto value: supply and demand, market perception, and competition. Understanding these factors is crucial to understanding what makes crypto go up or down.
Supply and Demand
One of the most common beginner questions regarding cryptocurrencies is, “Why does crypto go up and down?” This question is another way of asking how the value of cryptocurrencies is determined, and the answer is supply and demand.
The value of cryptocurrencies depends on their demand and whether the supply can meet the demand, much like any other goods people trade. Generally speaking, if the demand outpaces the supply, the value increases.
Most cryptocurrencies implement mechanisms to limit supply and prevent inflation. For instance, Bitcoin (BTC) is designed to have a fixed maximum supply (21 million BTC), after which mining more becomes impossible.
Demand depends on the number of people investing in crypto. As interest in cryptocurrencies and crypto investments grows, so does the demand, driving the value up.
Similarly, if investors consider the investment too risky, they may pull out and reduce the demand, causing a drop in value. If you’ve ever asked yourself, “Why is the crypto market down this summer,” it is primarily due to external circumstances like gas prices and inflation causing investors to pull out.
Crypto Market Perception
The market perception of a product, asset, or service is the amount of value an individual assigns to it. Although not the same concept as market value, it is closely related; the higher one’s market perception, the more one is willing to pay for it.
In other words, if you’re asking yourself, “Why is crypto going up,” it is because an increasing number of people have a positive market perception of it. A famous example occurred in November 2021, after the launch of the first Bitcoin exchange-traded fund. This event caused Bitcoin to reach its all-time high of $65,000.
However, the inverse is also true. When crypto markets are going down, it is typically because specific coins have lost market perception due to negative events, such as bad publicity, unethical behavior from project leaders, or security breaches.
Losing market perception reduces the demand for a cryptocurrency and drives its value down. If you ever asked yourself, “why is crypto going down?” or wondered why some tokens crash (its value fell to zero or near-zero), a loss of market perception is often to blame.
There’s no way to predict when crypto markets will go up or down at any moment. The market perception of a given coin depends on the confidence of its investors.
Competition in the Crypto Market
Every cryptocurrency is effectively a different implementation of the underlying technologies, and every crypto project is competing to see which functionalities are considered the most useful. As of August 2022, there are well over 20,000 cryptocurrencies on the market.
Although the barrier of entry is relatively low and many cryptos fail to take off, any newly introduced cryptocurrency can gain momentum, resulting in the value of other coins going down while the newcomer’s token gains value.