How Crypto Market Works? Understanding the Mechanism Behind the Cryptocurrency Market

There is a vast difference when it comes to how crypto currencies work when compared to the traditional financial sector. For the majority of the investors, it is still a mystery. The following article brief about how it works and how it differs from other markets.

Crypto Currency Prices vs. Fiat Currencies

Unlike fiat money, crypto currency is not backed by any commodity or any underlying value. It is neither backed by central governments and is not declared as a legal tender. At present, its value is only derived from the fact that governments have stated it to be something of value and it is up to the two parties carrying out the transactions to trust the valuations. Cryptocurrencies have a fixed supply; hence devaluation due to inflation is nonexistent.

Fluctuations in Cryptocurrency Pricing

Predominantly a nascent market, it will witness high fluctuations. As people are less aware of the term cryptocurrency, this will happen. Different qualities of the nascent market make it inherently volatile. Due to limited liquidity, the buyer-seller price gap is usually much broader. With time and more players in the market, things will change. At the start of 2018, 100,000 users each day signed up as per the Cryptocurrency exchanges.

Biggest Determinants of the Cryptocurrency prices

Supply and Demand are the two important determinants of cryptocurrency prices. Like any other financial market, with more sellers (high supply), the valuation will drop and vice versa. Public sentiment and media also play an important role when it comes to pricing of cryptocurrencies. Negative publicity can drastically lead to a dip wherein positive news can lead to a bull run. Lastly, the usefulness of the token plays a role in determining the pricing as well.

Price Changes in the Last 18 Months

If we track Bitcoin prices, it will give us a clear indication of the overall cryptocurrency market and how it has behaved over the last 18 months. Starting at $1000 in 2017, it reached a high of $20,000; it hovered around $6000 last year. Same fluctuations are evident across the crypto currency market which presently holds a market cap of about $250 billion.

Accuracy of Cryptocurrency Price Predictions

Similar to any other traditional market, there is no guarantee about future price predictions of the cryptocurrency markets. The predictions made last year by experts were here and there, and none of them were close to being accurate. Some factors worth considering any prediction include the level or nature of regulations imposed, the scale of cryptocurrency adoption, the growth levels of the cryptocurrency futures market, the utility of the coins and the ability of their underlying technology for solving realistic problems.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.