Cryptocurrencies are units of exchange that have value because people want to believe in them. While no other currency or asset type backs Bitcoin, stablecoins are backed by certain currencies or assets in order to protect them from the digital currency's high volatility.
All other factors being equal, highly-priced commodities have less demand, according to the law of demand. The law of supply, on the other hand, states that the quantity supplied is proportional to the amount. As a result, according to the rule of supply and demand, manufacturers can generate more revenue by selling more at a higher price, even though consumers stop purchasing high-priced products that require them to give up anything of greater value.
The value and price of something have traditionally gone hand in hand, although this does not necessarily imply that all highly-priced items are still valuable, and all low-priced items are less valuable. This introduces supply and demand to business speculation and forecasts.
Since the bottom line of cryptocurrencies as units of trade is trading, as more people choose to purchase and some want to sell, the price would rise. Prices would fall as more people are trying to sell cryptocurrencies and fewer are looking to purchase.
The same regional and global economic factors that affect fiat currencies also affect cryptocurrencies, and the link is usually obvious. Inflation, disease outbreaks, civil instability, the discovery of natural resources, and sanctions are only a few examples. However, there are several characteristics that are peculiar to cryptocurrencies, which are mentioned in the following excerpt.
1. How does cryptocurrency volatility affect it?
Volatility is a metric that measures how much a currency fluctuates over a given period of time. Cryptocurrencies, FOREX, bonds, and derivatives are among the most risky forms of investments. Cash, savings accounts, gold, and bonds, on the other hand, are safe investments.
Because of its history and tendency for wildly fluctuating prices, many people, especially in conventional markets, regard the cryptocurrency market as highly unreliable and unpredictable. With increased popularity, it is natural to see cryptocurrency prices rise. More people are trying to get in as soon as possible before prices climb any higher, and they are missing out on the opportunity to reap even more in the future.
Despite much confusion and speculation, cryptocurrencies such as Bitcoin have experienced huge growth rates and crushes in a short period of time.
For the first time in 2018, cryptocurrencies suffered the most major market crash, with the crypto market capitalization plummeting from a whopping $813 billion to $100 billion. Almost all coins have lost 90% of their value, and most haven't been able to restore their previous levels of value after the 2018 cryptocurrency crash.
2. Block reward reduction by half
Cryptocurrencies are regarded as difficult to comprehend and describe to the general public. The growing popularity and benefits of cryptocurrencies, as well as the promise of fast profits, have piqued people's interest. As a result, limited resources have opened up for those who can navigate the market, and many people have become wealthy as a result of investing in them.
Most cryptocurrencies have a finite total supply and a narrow, fixed divisible power, ensuring that their ability to spread further is contingent on their current price. Mining is one of the ways to make money with cryptocurrencies. To minimise the supply of coins and raise the price, block reward halving decreases the rewards that miners receive by half. The price of crypto is influenced by supply and demand just before and after the halving case.
3. Endorsement
Endorsements can have a positive impact on cryptocurrencies, particularly when celebrities or experts in some fields speak out about them, potentially causing a price increase as more people begin to invest in them.
Endorsing, on the other hand, can be used as a covert advertising for coins with lower value than stated. Inexperienced investors are misled by such cases, which create a transient demand and leave them with coins that do not provide the high returns that the endorsement promised.
Endorsements may also take the form of a well-known company releasing their own cryptocurrency, as with football clubs' fan tokens and Facebook's Libra. Such coins are awaited by their large consumer base, and they will most likely be in high demand and supply, with prices steadily rising.
4. Pump and Dump
Cryptocurrencies are beautiful, inclusive, convenient, anonymous, and inexpensive to transact with, and they offer individuals and the global economy unlimited opportunities. Each cryptocurrency has its own network and is used for a specific reason. They're also largely unregulated, which means there are plenty of opportunities to make fast cash through schemes that are both manipulative and illegal.
On cryptocurrency exchanges, pumping and dumping is a common practise. It entails finding and persuading unsuspecting buyers to purchase a specific asset in order to falsely inflate its price and then selling the asset once the price has risen sufficiently. It's common and lucrative, and it normally generates a demand for a particular coin before it's all sold at once, deflating the market. Initial Coin Offerings (ICOs) are a popular way to do this (ICOs). According to a Bloomberg survey, there were nearly 50000 pump and dump schemes on the Telegram messaging app in 2019.
Conclusion
In conclusion, it is evident that, as innovative as cryptocurrencies are, they are still subject to conventional business advantages and disadvantages. For both short and long-term investment strategies, they are exciting, easy, and profitable.
Investors should be cautious, though, since not all supply and demand is legitimate, and just as many people have lost money to cryptocurrency scams as those who have made a fortune. According to the rule of supply and demand, cryptocurrencies are in for a groundbreaking and exciting new decade as the technology that will usher in the fourth industrial revolution.
