4 Steps To Evaluating Crypto Prices

by Trading 101  //  Dec 24, 2018

“Bitcoin has broken the $20,000 barrier” was something all of us saw all over the news, social media, finance websites and more. With the rise of cryptocurrency a lot of people have started wondering how the price of a bitcoin is determined and how this differs from the way, let’s say, a stock price is calculated. These aren’t exactly things covered in Trading 101 anywhere in school or the internet, so let’s look at the 4 biggest factors that influence crypto prices.

Supply & Demand

Crypto works a lot differently from regular commodity trading. There are no corporations to buy from, banks to borrow from or dividend payouts to consider in comparison to other stocks one would potentially be interested in buying in. It’s also not regulated by a government or central bank, so the usual economic factors such as interest rates, inflation, GDP growth and others usually do not apply or play a very little role in its valuation. Most of the usual trading 101 tips and tricks don’t apply here.

In crypto, in most currencies at least, the supply of bitcoin is determined by two things. First is the protocol that governs a particular type of currency, which determine at what fixed rate bitcoins can be produced at. New additional bitcoins are tokened into the market when bitcoin miners process blocks of transactions, however the rate at which new tokens can be introduced slows down over time. This generally creates a scenario where supply increases slower than demand, driving up price.

The other factor in supply is the total amount of bitcoins that are allowed to exist at maximum capacity. For bitcoin in particular, this number is 21 million which is already very close to the number in circulation.

Competition

Bitcoin isn’t the only cryptocurrency out there, but it by far the most well-known and in-demand one. There are other currencies that are worth over a billion dollars and they come with their own sets of rules, features and goals. Common names that pop up in the crypto world are Ripple, Litecoin, Etherum and Dash. It’s the presence of strong competition that drives up (or drives down) the prices of currencies. Due the lower barriers of entry into the market, many new currencies pop up all over the place, but since a lot of the usual valuation rules don’t apply, marketing actually becomes a significant requirement to drive up prices.

Currency Exchanges

Just how regular stocks are listed on indexes such as NASDAQ and many others, cryptocurrencies have their equivalent with the biggest ones being Coinbase and GDAX. For a nominal fee, these exchanges facilitate the purchase or trade of cryptocurrencies. Said exchanges also have their own order types which work similar in the stock markets, called market, stop and limit. It’s these functions that allow crypto to emulate forex and trade in pairs such as BTC/USD. Any currencies that are not listed on these markets have a low chance of becoming popular.

Legalities

Every country is starting to come up with its own regulations regarding digital currencies. In the USA, several governing branches have expressed their intent to consider cryptocurrency as real securities and commodities. While it’s still unclear which exact regulatory body will be in charge of regulating cryptocurrency, the fact that it’s receiving regulatory approval is huge as it allows cryptocurrencies to be used as an underlying asset against new financial products. This can open cryptocurrencies up to investors who cannot access the currencies normally, which will increase demand. At the same time, it gives big institutions access to crypto, which will impact its valuation significantly.





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