The cryptocurrency market is a volatile place. Endless articles compare the price of bitcoin to other assets, such as gold or stocks. These comparisons may help understand how volatile the market can be, but they usually don’t tell you much about the value of any given coin.
In this guide, we will explain each aspect of cryptocurrency pricing to better understand what factors affect prices and how they relate to one another.
Cryptocurrency prices are constantly changing
Cryptocurrency prices are constantly changing, and they can vary significantly between exchanges. Therefore, the price of a cryptocurrency on one exchange may be significantly different from its price on another.
That’s because there are many factors affecting cryptocurrency prices. One factor is the number of buyers and sellers; if more people want to buy than sell, the price will rise (because sellers are more willing to accept less money for their coins).
Another factor is whether or not people hold onto their cryptocurrencies or spend them. If most holders spend their money rather than hoard it, it drives down demand for that particular coin. And thus, it becomes less valuable for everyone who wants to buy into that particular market.
Once again, we see no simple answer to understanding why cryptocurrencies behave that way. However, knowing these basic principles can help you make better decisions when investing in crypto!
Prices of cryptocurrencies can vary significantly between exchanges.
Prices on different exchanges can vary significantly for the same cryptocurrency. For example, the Bitcoin (BTC) price on Binance, a centralized exchange, is often higher than what you might find on Poloniex or Kraken.
This discrepancy exists because they are not competing in the same way that eBay and Amazon do. These exchanges don’t sell the same product and are not trying to lure your business away from its competitors.
Understanding why this happens is essential to make smart investments in cryptocurrencies. Especially if one particular cryptocurrency has caught your eye, its price seems off compared with others with similar characteristics and goals.
Cryptocurrency prices are meaningless without context
The price is an inferior measure of the utility of a cryptocurrency.
The price is also a feeble measure of the potential of a cryptocurrency.
It’s easy to get caught up in the hype surrounding Bitcoin and other cryptocurrencies, but it’s important to remember that many factors contribute to a cryptocurrency’s success.
A high market cap alone doesn’t mean it’s worth investing in, and investors should always consider more than just price when choosing which coins to invest in.
Bitcoin price and coin market cap are not the same thing
The price of bitcoin is the price of bitcoin on a specific exchange. The market capitalization (or total market value) of bitcoin is the total value of all bitcoins in circulation times their circulating supply.
The two numbers are not the same and don’t mean anything, even if they were.
Why? For one thing, consider that many exchanges’ prices aren’t quoted in USD. Instead, they’re priced according to BTC/USD or some other trading pair, with “BTC” being the abbreviation for “bitcoin.” So when you see a quote like “$5100”, it’s referring to 1 BTC (1 Bitcoin) and not 5100 USD/EUR/whatever else.
You can think about this as an exchange selling its currency at whatever rate it wants. So if it wants to set its BTC-denominated prices at a higher rate than other exchanges do because people will pay more for them there, it can do so by setting higher rates.
As such, people will buy more BTCs because there’s less risk involved if they use US dollars rather than euros or pounds sterling. As a result, there won’t be any exchange rate volatility between currencies.
You can make money on cryptocurrency while the market goes down
- You can buy a cryptocurrency and hold it long-term, hoping it will appreciate in value.
- You can also invest in cryptocurrency by buying tokens from projects that you think have a good chance of succeeding but with the understanding that they might not be successful.
- You could trade coins for other coins or fiat currencies (like dollars).
- You could buy and sell contracts such as options or futures.
- You could use your crypto as payment for goods or services (e.g., paying the rent with bitcoin) or simply as a “store of value.” You might not be able to withdraw it right away, but since it has been proven to increase in value over time, someone will always be willing to buy it from you at some point down the road
Predicting cryptocurrency prices is notoriously inaccurate
The difficulty of cryptocurrency price prediction is tied to the unpredictable nature of new technologies.
The technology behind cryptocurrencies is still in its infancy, which makes it difficult to predict how they will develop over time. This unpredictability is compounded by many different factors affecting cryptocurrency prices. Most notably, government regulation and market sentiment (investors’ feelings).
If you’re interested in using your knowledge about cryptocurrencies to make some money on the side, it’s worth considering whether this form of investing might be for you.
There is more to cryptocurrency than just its price!
There is more to cryptocurrency than just its price!
Cryptocurrency prices can tell you a lot about the market, but it’s not the only thing that matters. Many other factors contribute to the value of a coin:
- Market capitalization: this is how much money you would get if you could liquidate every single coin in circulation. A high market cap means lots of coins are available for trading, making it easy for buyers and sellers to match up with each other.
- Transaction volume: how much activity does each cryptocurrency see? This number shows how often people use your crypto for transactions and purchases compared to other cryptos. It might be worth buying if one crypto has higher transaction volumes than another but lower prices.
Cryptocurrencies are volatile and complex.
That’s why it’s important not to judge based on cryptocurrency prices alone. Instead, many factors influence a currency’s value, including new technology developments and governmental regulation.
Suppose you’re interested in buying or selling cryptocurrencies. In that case, we recommend doing so at a reputable exchange.
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