The growth of cryptocurrency has the potential to change the landscape of decentralized finance. In the last few years, the disillusionment with centralized finance has catapulted the growth of cryptos everywhere. People are realizing the positive consequences of adopting crypto. However, very few people are aware of the intricate and important factors that affect cryptocurrencies. Therefore, all crypto enthusiasts must know about its different features.
Factors Affecting Cryptocurrencies
Multiple macroeconomic factors influence the pricing of cryptocurrencies. Macroeconomic factors affect stocks, fiat currencies, and bonds in the same manner. It is easy for people to watch the prices of cryptocurrencies by using an exchange platform. Some factors however uniquely affect only cryptos and not other financial assets.
Supply and demand of Cryptocurrencies
The supply and demand cycle affects commodities, securities, and stocks. Similarly, the same cycle affects cryptocurrencies. For example, some cryptos such as Bitcoin have a limited maximum supply of 21 million tokens. The timely issuance of Bitcoins leads to halving which helps to grow the price of Bitcoin. However, many other cryptocurrencies do not have a fixed supply like Bitcoin.
Some cryptocurrencies may use a burn mechanism. This mechanism helps in restricting the circulating supply of tokens from growing excessively in value. The same rule of economics is also applicable to most cryptocurrencies. The price generally increases whenever the number of people willing to buy exceeds those who want to sell. The converse is also true.
Listings and Node Count
In a blockchain network, node count displays the number of computers. The higher nodes indicate a stronger network. Sometimes, higher counts may indicate that more people interact with a particular currency. The prices may increase even if it is preceded by a node count increase. If more people interact with a particular currency, it can lead to a high count. The listing of any token on popular crypto exchanges increases the driving up of prices. It also makes cryptocurrencies more accessible to a larger number of people.
Influence of Social Media and Market Sentiment
Fear and Greed Index is one of how sentiment plays a major role in whether the market is bearish or bullish. In a bullish market, most investors and traders perceive it favorably since prices constantly rise. In a bearish market, discounted prices and capital outflows are the norm. Both these market situations impact cryptocurrencies. Social media platforms also play an important role in disseminating information on various cryptos.
Macroeconomic Factors
Cryptocurrencies act as a hedge against macroeconomic problems such as inflation. Nevertheless, these are not completely insulated from outer abnormalities. During an economic recession, individuals can limit investments in any asset including cryptocurrencies. However, people can choose to stop crypto investments and hold. When the crypto market suffers it leads to an appetite for high-risk assets. Whenever interest rates rise, high-risk investments to low-risk ones and the reverse happens when interest rates decrease.
Also Read- Dubai Updates Crypto Token Rules
Bottom Line
The factors affecting cryptocurrencies are mostly beyond the control of ordinary users and business entities. However, proper analysis and observation of these factors can help users to improve the prospects of the outcomes. Therefore, it is always crucial to conduct one’s research and increase the probability of most crypto investments. Moreover, it is always advisable to have a diversified portfolio and remain cautious of the market while investing in cryptocurrencies.
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