Cryptocurrencies are purely digital. They have no physical form and only exist within the code of a blockchain. Because of this, some people believe they shouldn’t be worth anything. But that’s not how pricing works.
Cryptocurrencies are a tradable asset, much like stocks, commodities, securities and so on. Their price is determined by how much interest there is on the market in buying them – that’s called demand – and how much is available to buy – that’s supply. The relationship between the two determines the price.
If there is significant demand for a particular coin, but the currently available supply is limited, then the price increases. The demand for coins sometimes rises regardless of the currency’s true value – this is termed overbought. Alternatively, if a significant quantity of a coin is sold without a solid reason, it is described as oversold.
CRYPTO PRICE ESSENTIALS
- Price is determined by the relationship between supply and demand.
- The total amount of most cryptocurrencies is limited by max supply.
- Overbought coins are in high demand and are usually expensive.
- Oversold coins are in high supply and are usually underpriced.
Supply and demand of cryptocurrencies
The law of supply and demand is an economic theory that determines the relationship between the supply of a particular good or service and the demand for it, to see what effect that has on its price. The theory describes the fluctuations in the price of anything that can be exchanged on a market.
If a coin is in short supply or if the demand for it is high the situation results in an increase in price. Those who wish to buy it are willing to compete by offering ever higher prices. Alternatively, if a cryptocurrency is in abundance and if the demand for it is low, the prices fall.
Generally, the law of supply and demand predicts that if the demand for something rises, the suppliers will make more of it. Manufacturers are willing to expand their production to sell larger quantities, intending to profit from more sales. But that is impossible when it comes to most cryptocurrencies for two simple reasons: they are limited by max supply and they are distributed.
Max supply determines the total amount of each particular crypto that will ever exist. When it comes to Bitcoin, that number is 21 million. Over 18 million BTC have already been mined and the rest are slowly being added to the pool of total bitcoin supply. But couldn’t someone just change the protocol to release more coins? The simple answer is no. On a distributed network, a person who wanted to abuse the system by double spending coins simply could not do it unless they were willing to spend a lot more money than they would gain.
Can cryptocurrencies be overbought or oversold?
There are plenty of factors that have an influence on the demand for cryptocurrencies. The usefulness and purpose of what is in demand often takes a back seat to trends, media recognition, and endorsem*nt by public figures. Even the idea that someone might miss out on easy profit (FOMO) can play a big role in investment choices. Thus we might ask whether it is really justifiable that a stock, security or cryptocurrency experiences astronomical growth regardless of its inherent value?
People who think that it isn’t justifiable would describe such an asset as overbought. A combination of reasons, like those above, spark interest in a particular asset. Traders rush in to purchase it, and since its supply can no longer keep up with the demand, the price experiences substantial growth. Those who believe the asset is trading above its true value might perceive the hype as unreasonable and the investment misplaced.
OVERSOLD trading below true value (supply > demand) | OVERBOUGHT trading above true value (demand > supply) |
The reverse can take place, as well. An asset the supply of which is higher than the demand for it can be considered to be oversold. The number of people who want to sell it is greater than the number of buyers. With little or no interest in the asset, its price falls. A keen trader, recognizing the hidden potential of the asset, will make a purchase despite a prevalent negative atmosphere surrounding it. If the asset really were oversold, its price will correct back upwards and the trader will make a profit.
Versatility vs equilibrium in cryptocurrencies
When supply and demand are the same, they bring balance to the market. The amount of goods or services supplied is the same as the amount demanded. Market stability eliminates volatility, which brings about equilibrium.
In reality, no market is ever completely in equilibrium. Since crypto markets are still relatively young, they are even further from equilibrium than long-standing markets might be. Perhaps one day in the future the price of crypto will stabilize. But for now, its high volatility is part of what makes crypto so exciting, because it raises the stakes for traders. A market where prices move rapidly brings higher risk for traders, but also the potential for higher rewards.
Keeping your eye on the market that is open 24/7 is essential when you want to invest in cryptocurrency. An exchange like Bitstamp gives you all the tools to monitor the market and act quickly when you want to make a move. Register a free account or download our mobile app to never lose sight of your investments wherever you go.
FAQs
Put simply, the price of a given cryptocurrency is determined by how much interest there is in the market to buy (demand) as well as how much is available to buy (supply). If there is a high demand, but low supply, the price goes up. If there is a low demand, but a high supply, the price goes down.
What determines the price of cryptocurrency? ›
The price of cryptocurrency is determined by supply and demand. Most cryptocurrencies outline supply in their white papers. Meanwhile, demand is determined by multiple factors — like general interest in cryptocurrency, the project's utility, and competition.
What are the determinants of crypto prices? ›
The combination of supply, demand, production costs, competition, regulatory developments, and the media coverage that follows influences Bitcoin investor outlook, which is one of the most significant factors affecting cryptocurrency prices.
Who decides the value of crypto? ›
Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
How does the price of a cryptoasset move? ›
Consequently, a larger user base increases cryptoasset prices and makes the corresponding cryptoasset more attractive for other users and investors. In contrast, empirical studies show that non-fundamental factors affect cryptoasset prices.
What sets cryptocurrency price? ›
While supply and demand are the two key factors that determine the price of a cryptocurrency, there are however a range of other factors that may influence supply and demand - like utility, mass adoption, tokenomics, and market sentiment, all of which we'll explore in this guide.
What makes a crypto coin go up? ›
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.
What predicts crypto prices? ›
Technical indicators are the most common way of predicting crypto price movements. One of the most used technical indicators are moving averages. Insights are drawn from whether the price is above or below important moving averages like the 21-day, 50-day, and 200-day averages.
What sets the bitcoin price? ›
The Bitcoin price is determined through supply and demand. A finite supply of bitcoin mitigates inflation and deflation risks. The stock-to-flow model uses the current circulation of bitcoin and the rate of production to measure the effect of scarcity on the BTC price.
What algorithm predicts crypto prices? ›
The paper suggests that the Recurrent Neural Network (RNN) with Long Short-Term Memory (LSTM) is best suited for cryptocurrency price prediction. The paper suggests that the Bi-Directional LSTM (Bi-LSTM) algorithm is the best suited for predicting the price of cryptocurrencies.
Summary: As of 2024, there are about 420 million cryptocurrency users globally. Of these, approximately 1.5 million individuals possess more than 1 Bitcoin, which is just 0.36% of all cryptocurrency users. Here's the detailed breakdown: - Total Bitcoin Supply: The maximum number of Bitcoins is capped at 21 million.
Who regulates crypto prices? ›
Key Takeaways. Bitcoin regulation can vary on both the national and local levels, depending on the country or geographical area. In the U.S., the IRS treats cryptocurrency as property, while the CFTC considers it a commodity.
Who owns the most bitcoin? ›
So, who are the top holders of BTC? According to the Bitcoin research and analysis firm River Intelligence, Satoshi Nakamoto, the anonymous creator behind Bitcoin, is listed as the top BTC holder as of 2024. The company notes that Satoshi Nakamoto holds about 1.1m BTC tokens in about 22,000 different addresses.
Who controls the price of crypto? ›
Price is determined by the relationship between supply and demand. The total amount of most cryptocurrencies is limited by max supply. Overbought coins are in high demand and are usually expensive. Oversold coins are in high supply and are usually underpriced.
How to calculate the price of a crypto? ›
At first glance, the formula for crypto cost basis is simple: Total Purchase Price divided by Number of Tokens. For example, let's say you paid $500 for 10 AAVE tokens. $500 / 10 = a cost basis of $50 per token.
How are crypto prices manipulated? ›
The most popular are: Pump and dump: This is the artificial inflation of the price of an asset and is a practice that has been conducted for many years on various markets. It involves a series of sales and purchases of a cryptocurrency to create the impression that the asset is increasing in value.
What determines Bitcoin's price? ›
Bitcoin's price increases when demand exceeds supply and decreases when demand falls. Other factors such as the cost of producing bitcoin through mining, regulations, news, and competition from other cryptocurrencies can influence the supply and demand and thus, influence the bitcoin's price.
What is cryptocurrency backed by? ›
Backing a currency is done by the currency's issuer to ensure its value. Bitcoin, gold, and fiat currencies are not backed by any other asset. Bitcoin has value despite no backing because it has properties of sound money.
How do you predict the price of cryptocurrency? ›
How to predict crypto prices? Technical indicators are the most common way of predicting crypto price movements. One of the most used technical indicators are moving averages. Insights are drawn from whether the price is above or below important moving averages like the 21-day, 50-day, and 200-day averages.
