Gareth Johnson
Gareth Johnson
Updated on September 14, 2021

With fiat money like USD or EUR, things are pretty clear regarding the inflation rates and factors that influence the fluctuation of a currency’s value. Governments and central banks control the supply of their currency – it’s as simple as that. In the case of USD, the US government controls the supply and inflation rate through the Treasury Department, responsible for printing new dollar bills, and through the Federal Reserve System, which is the central bank of the United States of America. 

Real-world events such as the fall or rise of the price of gold or oil, or turbulent price changes on the stock market (for example, a crash of the stock of a valuable US company), have an impact on the value of the US dollar. However, the USD doesn’t ever have drastic price changes. The impact of these minor price fluctuations is only noticed when large amounts of dollars are in play. The everyday consumer won’t really notice a difference in their buying ability from a minor change in the worth of the dollar in financial markets.

When it comes to cryptocurrencies, the situation is totally different. Their prices can’t be controlled by any institution and they are highly volatile, which means that their values can jump or fall on a much higher scale than they can with fiat money.

Let’s take a look at what are the exact reasons for this and which factors drive the price of digital currencies.

Cryptocurrency Price Determinants

Cryptos like Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Ripple (XRP), and other altcoins aren’t dependent on central authorities such as governments, banks, and monetary policy. Cryptocurrencies are projects initiated by numerous developer teams, startups, or companies, with the aim of providing users with digital coins which can be used within a set ecosystem. 

Stock market analyzer of BTC and USD on blue screen

Bitcoin was designed as the first decentralized, digital cash, while Ethereum is more focused on providing programmers with tools for developing decentralized apps and launching smart contract functionalities on the ETH blockchain. Thousands of other cryptos have their own agendas that aren’t simply limited to the role of digital money, even though you can use most cryptos as virtual cash if you want to.

The value behind cryptocurrencies is determined by various factors that influence their price on cryptocurrency exchange platforms. These are the main determinants of cryptocurrency market value, but you should note that even when considering the influence of these factors, you can’t simply predict the fluctuation of crypto prices because digital currencies are highly volatile.

Cryptocurrency Adoption Rate

Cryptocurrencies aren’t backed by governments and banks. What they are backed by is their adoption rate among people worldwide. The more people agree to accept a certain virtual currency as a valid financial tool or medium of exchange with a certain value, the more the price will go up, thanks to the increased trading volume and market capitalization of that currency. 

The main reason for adopting a specific crypto such as BTC is the quality of its ecosystem and its reliability. Bitcoin managed to gain huge popularity and an ever-increasing adoption rate thanks to its blockchain network, which runs on a perfectly secure proof-of-work algorithm that makes sure every transaction is legit and there is no fraudulent behavior such as double spending of the same assets.

The quality of Bitcoin’s service is what put it on an upwards path in terms of its adoption rate and valuation. The same goes for other cryptocurrencies. If a project delivers on its promises and manages to provide users with high-quality services, then the adoption rate will rise, because reliable and safe crypto functionalities are what people want from digital currencies. 

It’s also important to note that as the adoption rate of crypto grows, so does the number of corporate players that want to use it. When a huge company such as Tesla or PayPal includes Bitcoin in their financial portfolio, this has an impact on the adoption rate of that crypto among the people who already trust these companies.

Crypto Supply and Market Demand

The circulating supply of a specific cryptocurrency along with the market demand for the coin is another important factor that determines a currency’s pricing. Some crypto projects such as Bitcoin have a hard cap which determines the total amount of the coin that will be in circulation at one point. 

For instance, the supply of Bitcoin is 21 million units but not all of these bitcoins are in circulation. A large chunk of this number is yet to be produced by Bitcoin mining. Some other cryptos have a much higher maximum coin cap, while there are also numerous currencies that don’t have a defined maximum, with developer teams progressively launching additional amounts of coins on the market. 

Vector illustration of demand and supply road sign on blue cloudy background

If a cryptocurrency is becoming increasingly popular, like BTC or ETH are, but the number of circulating coins is scarce compared to the demand for those coins, then the price of Bitcoin or Ether will be on an upwards path. In fact, if there is more demand for a coin than the number of units in circulation, the currency might become even more valuable, especially if the crypto is popular. In the case of BTC, you have a coin that is worth several tens of thousands of dollars and is literally regarded as digital gold.

The developer teams behind a crypto project are the ones that define how much of their currency will be initially available to users on the market, and they define the policy for creating new coins. Some crypto projects work as tokens for specific web platforms and when users are active on those platforms, they get awarded fresh coins. Other cryptos like BTC or ETH have to be mined by powerful mining rigs and their GPUs

In the end, the supply and demand for a cryptocurrency largely influence its market price. This is why crypto developers tend to constantly update their crypto projects and look to improve their portfolio of services as well as their security because the quality behind a cryptocurrency largely influences the market demand for that asset. You can easily monitor the supply and market cap of all cryptos on CoinMarketCap.

Fiat Money Inflation

The inflation rate of fiat currencies can also influence the value of certain cryptos such as Bitcoin, Bitcoin Cash, Litecoin (LTC), and similar currencies that work as digital cash. If the value of the US dollar starts dropping because of real-world economic or political events, the price of cryptos, as they’re mainly used as virtual money, could start gaining value compared to the USD. This means that if you’re storing value in BTC, you can exchange your coins for a larger amount of dollars, profiting from a cash-out. 

This is why it’s always good to pay attention to the volatility of cryptos when the USD or EUR are losing value because it might trigger a rise in crypto value.

Media Influence

The media has huge power as a contemporary opinion maker. While the adoption rate of a cryptocurrency directly influences the price of the asset, popularity is an important factor that contributes to an increased adoption rate, and this is why media has a certain influence over the price of crypto. 

Various media outlets have different agendas when it comes to cryptocurrency. For instance, media that is oriented towards traditional finance might not cover news about Bitcoin or Ethereum in a very positive way, but some other tech-oriented or crypto-savvy media platforms will surely cover the subject in a more affirmative manner. The media which aren’t crypto-friendly will always be eager to report about the drawbacks of crypto, while the ones that are more open towards crypto will tend to report about it in a more realistic way.

White mobile attracting likes, heart reacts, and emojis on white background

Bitcoin, for instance, has had a lot of negative media attention since its launch, but thanks to its great blockchain technology, it managed to reach the point where a considerable portion of the media covers BTC-related subjects without skepticism. 

Social media is also a very important factor for the popularity of a cryptocurrency and Facebook groups, Twitter accounts, and crypto-related forums have a huge role in building the popularity of a crypto project. 

Through its influence on the popularity and adoption rate of cryptocurrencies, media has become an important factor in determining the price of digital currencies.

Manipulative Trading Tactics

A common factor that can cause the sudden rise of a cryptocurrency’s price is the manipulative trading tactic called pump and dump. This is when a large number of traders conduct a coordinated market pumping of a selected crypto. 

They select a certain asset and then place a bunch of purchase orders on exchange platforms, creating an artificial price rise thanks to the increase of demand they are driving by purchasing the crypto. After they’ve successfully pumped the price of a cryptocurrency, the brokers suddenly cash out all of the purchased cryptos, profiting in the process, while the crypto’s price starts suddenly falling during the dumping process. 

A lot of developer teams and organized broker teams implement this tactic to either make some cash or to create a buzz about their cryptocurrency and leave people with the impression that they should invest in that currency.

A Few Final Words…

As you can see, there isn’t any decisive factor that determines cryptocurrency value on its own. There is no centralized institution that can control the price changes of cryptos, but there are several factors that contribute considerably to the rise or fall of a cryptocurrency’s price. The factors listed in this guide are among the key aspects that form the price of digital assets.