During the pandemic, many investors were enticed by cryptocurrencies, but since last November, this alternative asset class has lost more than $2.3 trillion. Investors should only include a very small percentage in their portfolios if they can afford to keep their funds there for a considerable time. Although this asset category may not have bottomed out, it is still risky.
Financial markets are experiencing an extraordinarily volatile period, and investors are increasingly playing preferred casino games after applying their Springbok Casino bonus as they watch the fluctuations. That is why it is no longer unusual for Bitcoin, the most popular cryptocurrency, to gain or fall in value by 5% to 10% on any given day and for lesser currencies to have even higher swings.
What makes cryptos volatile?
Unlike fiat currency, which central banks support, most cryptocurrencies are not backed by a centralized authority. A government's backing can increase consumer confidence in a currency's worth. Still, most of the 13,000 cryptocurrencies in use today lack such support and must instead derive their value from other sources.
Here are some top factors shaping the crypto market.
1. Node Count
The node count indicates the number of active wallets in the same network. Simply conducting a Google search or visiting the currency homepage will yield this information.
But why does node count matter? It first demonstrates the vigor of the community. A robust community is represented by a high node count, increasing the likelihood of that currency surviving future crises. Second, a significant amount of nodes can also represent a network's strength and decentralization, two crucial aspects of cryptography.
2. Production Cost
Another variable that affects the value of cryptocurrencies is their production costs. Miners create new tokens daily and validate novel network transactions using specialized hardware or computers. Virtual tokens and a network fee are given to miners as remuneration for their work.
Decentralized cryptocurrencies are thus able to continue operating thanks to miner network activity. So, the value of cryptocurrencies may rise if mining expenses rise. If the payouts are too small to offset the costs and turn a profit for the miners, it makes no sense for them to invest their resources in mining new cryptocurrency tokens.
Remember that this is only the case sometimes, and all cryptos operate differently.
3. Notable events
A special event can also impact cryptocurrency's value. Because speculative investors want to avoid missing out on the chance to potentially make multiple returns on their investment, media hype surrounding the launch of a cryptocurrency, for instance, may significantly impact trading volumes. This would cause the price of the cryptocurrency to rise.
Other instances include a cryptocurrency being listed on a significant exchange, a regulator revealing the results of an investigation into a cryptocurrency, and introducing a new version, such as when Ethereum introduced a new feature like proof-of-stake.
4. Interest-rate adjustments
Like in most markets, when a Reserve Bank raises interest rates, the market tends to shift away from riskier investments and toward lower-risk ones as the yields on these latter become more alluring in comparison to the risk profile of the former.
As a result, tech stocks and cryptocurrencies are among the first asset classes to witness their prices decline when interest rates are increased. When interest rates are decreased, the opposite is true.
5. Demand and supply
Like tradable assets like stocks, securities, and commodities, demand and supply is a fundamental economic theory that affects the price of cryptocurrencies. The scarcity of some cryptocurrencies, such as Bitcoin, which has a cap of 21 million tokens, significantly affects price fluctuations. The price of cryptocurrencies will rise as demand rises.
6. Utility
Many cryptocurrencies address real-world issues, which is one of the key factors contributing to their popularity. Consider the AAVE protocol, which functions as a de facto bank by accepting deposits and disbursing billions of dollars worth of tokens to customers in a matter of seconds while having no payroll-supported staff.
7. Adoption
Similar to the demand-and-supply rule previously mentioned, a cryptocurrency's price will be greatly influenced by its level of acceptance. These adoption levels will significantly impact a cryptocurrency's value, whether it be Walmart announcing that they will accept Bitcoin as payment or El Salvador passing legislation making Bitcoin acknowledged as legal tender.
8. Market sentiment
Cryptocurrencies are impacted by cycles, much like all markets. A bull market will benefit investors, while a bear market will achieve the opposite. The Fear and Greed Index can be used to gauge the market mood. The Crypto Fear and Greed Index measures investor sentiment toward the market and determines whether it is bullish (high) or bearish (low).
Investors can choose the cryptocurrency they invest in, although these factors are mostly outside our control. An investor seeking long-term success should put money into cryptocurrencies that are on course to solve real-world problems and are showing evidence of widespread acceptance, even though short-term volatility is likely.
Take away
Choosing an investment with solid foundations at its heart is ultimately the key to sustainable progress in any financial endeavor, even though outside forces influence all markets. If you want to diversify your investments, these eight are some of the leading factors influencing the market.
