It is estimated as of mid 2021 that there are around 10,000 different types of cryptocurrencies. In order to find out what affects the prices of those cryptocurrencies we need to dive deeper into the different and most popular types of cryptocurrencies.
What Are The Most Frequently Traded Cryptocurrencies Based on Volume?
Based on Statistica, the top 5 traded cryptocurrency in 2021 are:
- Tether
- Bitcoin
- Ethereum
- Ripple
- Dogecoin
So let’s take a look each and what affects their prices.
What is Tether (USDT)?
The ticker for Tether is USDT, it is a Stablecoin and it is pegged to the US Dollar. By pegged this means that the price of Tether will vary based on the price of the US Dollar. 1 USD will always attempt to be equivalent to 1 Tether coin. If you want to know the formal definition of pegged and its purpose feel free to read more about it here: https://www.investopedia.com/terms/c/currency-peg.asp
What this means is that it should be unaffected, mostly, by the usual swings in the cryptocurrency market. This stability is where its main use lies. With Tether you can hold your cryptocurrencies in a more stable wallet.
So what affects the price of Tether coins? It’s the US Dollar.
What is Bitcoin BTC?
This is probably the most asked question about cryptocurrency. The technical details are complicated but the closest thing that you could compare it economically would be to Gold but at the same time it is much more in combination with the blockchain.
What affects the price of Bitcoin?
1. Limited Supply of Bitcoin
By Gold I mean that Bitcoin has a limited supply. There is a finite number of Bitcoin available. This limited supply is the main driver of its value right now.
2. Confidence / Adoption of Bitcoin
As services start to implement Bitcoin and it more widely adopted by users, more goods are traded against Bitcoin but also the confidence in the value that Bitcoin is bring is also going to affect its value. Similarly, when nobody thought Bitcoin had a future its value was low.
3. Speculation / Regulation / Public Opinion of Bitcoin
The price of Bitcoin also changes if more people are willing to buy them at a premium. This usually happens when individual traders decide to buy after may be a positive news regarding Bitcoin, like a tweet from Elon Musk or may be the Ukrainian parliament voting a bill on to legalize Bitcoin.
4. Large Financial Companies
Companies like Paypal investing more in Bitcoin has driven up the prices as well. This happened in 2020 where the Bitcoin value crossed 30,000 USD.
5. Wallet Hacks Negatively Impact Price Of Bitcoin
There many hacks that happen during a year on the wallets keeping the Bitcoins. Based on a research paper that you can read here: https://www.researchgate.net/figure/Historical-Price-of-Bitcoin-during-Mt-Gox-Hack-in-2014-9-Data-source-Coinmarketcapcom_fig1_341153855
Approximately one hundred cryptocurrency thefts, including hacks and scams, has occurred since 2012 to 2018, half of which are hacks of Bitcoin.
Security breaches of the cryptocurrency exchanges usually cause the price fluctuation in the market.
6. Mining Difficulty of Bitcoin Increases Price
Another factor that affects the price of both Ethereum and Bitcoin would be mining difficulty. The mining difficulty keeps on increasing exponentially, this means that more time and energy (electricity) is required to mine new Bitcoins and Ethereum.
What is Ethereum?
Moving on to the next cryptocurrency on the list. Both Ethereum and Bitcoin are traded, but the main different with Ethereum is that there is an infrastructure to have applications and contracts powered by Ether run on its blockchain.
In the case of Ethereum the same 5 factors as Bitcoins affects its price. You might also add innovation and adoption of the technology in application for Ethereum, however, it still has scalability issues to address.
What is Ripple Coin / XRP?
Ripple coin is used for payment purposes. It is used to facililate payment settlements and contrary to the other coins above you could call it a utility token. This is important to distinguish because you will usually buy XRP to pay for fees.
The supply for XRP is also different, it is planned by Ripple Labs that 1 billion new XRP will released every month. And also you don’t mine XRP. I will let you deduce your own conclusion here.
The main factor which affects XRP based on its ticker, is speculation. The highest it has been was in 2018 at around 3.4$ right when the news hit traders that financial institutions were adopting XRP and caused traders to rush to buy XRP.
What is Dogecoin?
This coin was created a joke (who would have guessed) to create a payment system. But this is why we all love the internet. Despite it being clearly a joke, if people see value in it then it will have value.
What affects the price of Dogecoin?
The factor which affects Dogecoin is, like you might have guessed already, speculation. A lot of traders are jumping into crypto with the fear of missing out and holding Dogecoin.
You can actually mine Dogecoin and the supply limit for Dogecoin is actually unlimited.
Summary
In short, research well into how different cryptocurrencies work and you should be able to figure out what affects the prices.
