Observing the state of the crypto industry, especially as an outsider, can be very interesting. On the one hand, we cannot necessarily see or touch crypto assets. On the other hand, these digital assets can be worth millions of dollars and drive an entire sector.
As Kane Pepi points out, If you’re investing from a place where price is the key factor, you’ll find plenty of affordable tokens in the market. If you’re in a financial place where you can invest more money, there are tokens that will cost you thousands of dollars. But what makes crypto cheap or expensive and what drives changes in these prices? We break it down in this article.
Supply and Demand
One of the biggest factors that affect crypto price is the supply and demand of the token in question. It is a classic rule of the market that when supply is less than demand, the value of an asset increases and this applies to the crypto space as well. If you take a look at the whitepaper (essentially the manifesto) of any blockchain project, you’ll likely see the team’s plans with regard to its release of the token in the market to manage the supply.
In the case of Bitcoin, for example, the amount of tokens released per block is strategically cut in half roughly every 4 years. This reduction in the supply has been associated with a spike in the value of Bitcoin and has even been adopted by other cryptocurrencies. On the demand side, there are several things that can drive the demand for a token, especially its utility.
A token like Solana, for example, is high in demand for use in online casinos, for buying goods and services, in the DeFi space, and much more. The more demand there is for a token, the higher its price. So, when you see a token’s price going up, it is due to its demand going up as well.
Media Reporting
Another thing that influences the price of a crypto is the media’s reporting on both it, its founders, and its native project. It is not unusual for the media to have an impact on investor decisions and the crypto industry sees the same effect.
The media often speculates about the possible changes to a token’s price and this can spark a bear or bull run. If the media says that a certain token is the next big thing, for example, people will rush out and buy it and this increases its price. The media reporting about whales buying up many units of a token or selling off a mass of it could also trigger a price change. The same happens when the media reports negatively about a token.
You also need to consider reporting about its management. When former Binance CEO Changpeng Zhao was arrested last year, for example, its native BNB token saw a price hit. Interest from popular figures can also increase the value of a token, as seen in the example of Dogecoin and how its profile (and price) was raised after Elon Musk took an interest in the meme coin. So far, it is clear that media reporting can make or break a crypto token.
Regulatory Developments
The cryptos sector is a relatively new one and this means that, inevitably, it will butt heads with regulators around the world. And the effects of these regulatory scuffles are reflected in the price of the tokens. When Ripple Labs, for example, scored a win in its lawsuit with the SEC, its native XRP token saw a price spike. The way the market saw it, the court ruling was an indication of the project’s quality so they rushed to buy the token.
When the SEC approved the spot Bitcoin ETF earlier this year, it triggered a massive price spike for the token and eventually, Bitcoin reached a new all-time high. The last few years have seen many other regulatory wins for the industry around the world like pro-crypto laws being passed, crypto being accepted as legal tender in some countries, and much more. Usually, a specific token or the markets in general see a boost.
There are also effects felt when there is a negative regulatory development. Every time the SEC has announced that it is suing a crypto company or investigating a crypto venture, the market tends to reflect this. Good or bad, regulatory developments have an effect on the crypto scene.
Associated Benefits
Many cryptos offer value to customers not just by themselves but because of the benefits attached to them. For example, metaverse and GameFi projects often have native tokens attached to them and the more popular these projects become, the more valuable the tokens attached to them are.
This is also true of tokens whose underlying blockchains are used extensively. Ethereum, for example, is prominently used in DeFi, NFT, GameFi, and much more. The more the blockchain is used for various purposes, the more demand there will be for its native token Ether, which drives up its demand.
Utility tokens also enjoy price spikes from associated benefits. There has been a spike, for example, in fan tokens for sports clubs. These tokens are often used to unlock various benefits like VIP sections, early access to tickets, meet-and-greets with athletes, and much more. These tokens are now a hot commodity among sports fans and the value of their associated benefits reflects on their market price.
The more the crypto space evolves, the more creative uses people will come up with for tokens, whether they’re being used to facilitate fractional investments or giving access to exclusive experiences. This means that the tokens will continue to see increased market value.
Pump-and-Dumps and Other Scams
Unfortunately, not all crypto price movements are organic or driven by genuine market forces. As an investor, it is important that you are aware of the concept of pump-and-dumps. This is a situation in which the creators of a token artificially drive up its price to trick investors out of their money.
How this works is that the token is released into the market and the creators buy up a large amount of it in one go to drive up the price. Investors, unaware of this trick, then buy the token at the inflated price hoping to cash in on its development. Once the creators have resold their tokens at this higher price, they abandon the investors with the worthless token.
Because the token’s growth was inorganic and there was no actual value to it, the price then crashed. This is similar to other crypto scams like shitcoins that trick people into buying a token (usually at an inflated price) which leads to both a price rise and fall.
This is why, as an investor, it is important to research each token you are considering and find out if its price point is organic or manipulated.
Conclusion
Crypto prices are an endless source of fascination for those both inside and outside of the industry. It is important to know the mechanisms that impact the prices of tokens to know what to look out for and how to spot both genuine and inorganic price shifts.
